Meta Platforms, Inc. (formerly known as Facebook) is one of the largest technology and social media companies in the world. Its stock ticker symbol is META and it trades on the NASDAQ. Meta’s share price has declined significantly in 2022, falling over 60% year-to-date. This has led many investors to wonder if Meta’s stock is currently undervalued and worth buying.
What does Meta Platforms own?
Meta Platforms owns some of the most popular social media platforms and apps including Facebook, Instagram, WhatsApp, Messenger and Oculus. As of Q2 2022, Facebook had 2.93 billion monthly active users, Instagram had 1.98 billion monthly active users, WhatsApp had 2 billion monthly active users, and Messenger had 3.3 billion monthly active users. This gives Meta an enormous reach and makes it one of the top social media and messaging companies worldwide.
In addition to its social media properties, Meta is investing heavily in virtual and augmented reality through its Oculus segment. Meta believes the metaverse represents the next computing platform and that VR/AR will enable new immersive social experiences. While the metaverse is still in early stages, Meta’s push into this space provides potential for future revenue growth.
Why has Meta’s share price declined in 2022?
There are several factors that have driven Meta’s share price lower this year:
- Slowing user growth – Meta reported its first ever quarterly decline in Facebook daily active users in Q4 2021. This raised concerns about Meta’s future growth prospects.
- Tough competition – Apps like TikTok are taking share in the social media market, challenging Meta’s dominance.
- Apple iOS changes – Apple’s privacy changes on iOS have made ad targeting more difficult, which has negatively impacted Meta’s advertising revenues.
- Increased spending – Meta has significantly increased investment in areas like the metaverse, VR/AR, video content, and e-commerce. These newer initiatives weigh on profits.
- Weak guidance – Meta’s forward guidance for revenue and earnings has trailed analyst estimates, disappointing investors.
- Macroeconomic challenges – Broad market declines driven by inflation, rising rates, recession fears have also impacted Meta’s shares.
Meta’s financial performance
Despite its falling share price, Meta delivered solid financial results in Q2 2022:
- Revenue: $28.8 billion, down 1% year-over-year
- Net Income: $6.7 billion, down 36%
- Earnings per share (EPS): $2.46, down 49%
- Operating cash flow: $7.7 billion
- Free cash flow: $1.4 billion
Revenue was roughly flat year-over-year, as growth in Meta’s Reality Labs segment offset declines in its advertising business. Net income and EPS fell sharply due to Meta’s increased investments. However, cash generation remains strong.
Here is a summary of Meta’s revenue by segment:
| Segment | Q2 2022 Revenue |
|---|---|
| Advertising | $28.2 billion |
| Reality Labs | $452 million |
| Other revenue | $192 million |
Advertising remains Meta’s core business, accounting for over 98% of total revenue. Reality Labs includes Meta’s VR/AR products and metaverse platform. This segment is currently losing money as Meta invests heavily in its future potential.
Is Meta stock undervalued?
With Meta’s shares down over 60% year-to-date, many analysts argue the stock is undervalued at current levels. Here are some valuation metrics for Meta:
- P/E ratio = 14x (based on 2022 EPS guidance mid-point)
- P/S ratio = 3.6x
- P/B ratio = 3.0x
Based on these ratios, Meta’s stock appears relatively inexpensive compared to both its historical averages and its technology/social media peers. Meta’s 5-year average P/E ratio is 23x, for example. Its trailing P/E hit a high of 36x in 2020.
Some analysts point to Meta’s strong free cash flow generation and rock solid balance sheet as reasons the stock is undervalued. Even with its heavy investments, Meta produced free cash flow of $1.4 billion in Q2 2022 and ended the quarter with $40.5 billion in cash/marketable securities on its balance sheet.
Overall, analysts see upside potential in Meta stock given its current depressed valuation and future monetization opportunities in areas like short form video, business messaging, e-commerce and the metaverse.
Risks facing Meta
While Meta’s stock may be undervalued, there are also important risks facing the company that could impact future performance:
- User engagement – If Meta’s apps continue to lose users’ time and attention, ad revenue could fall.
- Targeted advertising – More regulation around users’ data privacy could make ad targeting less effective.
- Metaverse uncertainty – It is unclear if the metaverse will become a mainstream success and drive profits.
- Competition – Strong rivals like TikTok and Apple’s iMessage could take market share.
- Cost inflation – Meta plans to rapidly hire engineers which will increase costs and weigh on margins.
- Macroeconomy – A weaker economy marked by higher inflation and interest rates could reduce ad spending.
Meta faces an uncertain outlook. While its stock appears cheap based on current financials, its future growth drivers come with execution risk. Investors must weigh Meta’s potential against these challenges.
Wall Street analyst price targets
Here is a summary of recent Meta stock price targets from Wall Street analysts:
| Firm | Analyst | Rating | Price Target |
|---|---|---|---|
| Merrill Lynch | Justin Post | Buy | $160 |
| Barclays | Ross Sandler | Overweight | $170 |
| Evercore ISI | Mark Mahaney | Outperform | $180 |
| Needham | Laura Martin | Buy | $150 |
The average 12-month price target of these analysts is approximately $165, representing 65% upside from Meta’s current share price around $100. In aggregate, analysts see significant appreciation potential even after the stock’s steep decline.
Should you buy Meta shares?
Meta offers an intriguing risk/reward proposition at current levels for long-term investors:
- Valuation is attractive relative to history and peers
- Strong core business throws off substantial free cash flow
- Owns top social media and messaging apps with billions of users
- Significant optionality in futuristic bets like metaverse, VR/AR, video, e-commerce
However, Meta faces enormous challenges to reignite growth and navigate a rapidly evolving digital landscape. Regulatory threats also loom large. Its success is not guaranteed.
For investors willing to look past near-term volatility, Meta appears undervalued. Its stock could reward those who buy at depressed levels. But it remains a high risk, high reward proposition given the potential for metaverse initiatives and social media trends to underwhelm. Proceed with caution.
Conclusion
Meta’s stock has been punished in 2022, losing over 60% of its value. Shares now trade at just 14x forward earnings, a big discount to historical levels. With Meta continuing to generate strong profits and free cash flow, many analysts argue the stock is undervalued.
However, Meta faces risks related to increasing competition, user engagement trends, macroeconomic conditions, and uncertain returns from big metaverse investments. While the risk/reward looks compelling, Meta’s future growth is not assured.
For long-term investors, Meta may be worth accumulating at current beaten-down levels. Just be ready for plenty of volatility along the way as Meta navigates its transformation into a metaverse company.