Meta Platforms Inc (META) is one of the world’s largest technology and social media companies. Formerly known as Facebook, Meta owns popular social media platforms like Facebook, Instagram and WhatsApp. The company has faced several challenges in recent years, including privacy concerns, antitrust lawsuits and a slowdown in user growth. This has led to Meta’s stock price dropping significantly from its all-time high. So is Meta stock a good buy now or should investors sell or hold off?
Meta’s Business Model
Meta generates revenue primarily through advertising on its family of apps. This includes Facebook, Instagram, Messenger, WhatsApp and Oculus. Meta has over 3.5 billion monthly active users across its apps, providing a massive audience for advertisers.
The core Facebook app has 2.93 billion monthly active users while Instagram has 1.478 billion. WhatsApp and Messenger each have over 2 billion monthly active users. This huge user base allows Meta to collect vast amounts of data on its users and serve targeted ads.
Meta allows advertisers to display ads to specific demographics and interests. It uses advanced algorithms to optimize ad performance and pricing. Meta’s platforms also feature powerful analytics tools for advertisers. As a result, Meta commands high ad prices compared to competitors.
In 2021, Meta generated $118 billion in total ad revenue, making up over 97% of its total top line. Despite its reliance on ads, Meta has diversified revenue streams like payments, hardware, creator monetization and the metaverse which could drive future growth.
Growth Over the Years
Meta has achieved phenomenal growth since its IPO in 2012 when it had just 1 billion monthly active users. The chart below shows how Meta’s revenue and net income has grown over the last decade:
| Year | Revenue (in billions) | Net Income (in billions) |
|---|---|---|
| 2012 | $5.09 | $0.53 |
| 2013 | $7.87 | $1.50 |
| 2014 | $12.47 | $2.94 |
| 2015 | $17.93 | $3.69 |
| 2016 | $27.64 | $10.22 |
| 2017 | $40.65 | $15.93 |
| 2018 | $55.84 | $22.11 |
| 2019 | $70.70 | $18.49 |
| 2020 | $85.97 | $29.15 |
| 2021 | $117.93 | $39.37 |
As evident, Meta has grown revenue and profits rapidly since its early years. User growth on Facebook and Instagram has allowed Meta to mint money from ads. However, growth has slowed down considerably in the last few years.
Recent Challenges
After years of exponential growth, Meta has faced several challenges recently:
Slowing User Growth
Meta’s flagship Facebook platform has seen declining user growth rates in North America and Europe. New user sign ups are plateauing in these saturated markets. Engagement per user is also decreasing as people shift to other apps like TikTok.
Instagram is still growing in users but the pace has slowed. WhatsApp and Messenger are popular messaging apps but don’t drive ad revenue directly.
Reduced Ad Targeting
Apple’s iOS privacy changes have reduced Meta’s ability to track iPhone users and target ads. Meta has also reduced ad targeting on its platforms due to regulatory pressure.
This affects Meta’s ability to monetize its users. Average ad prices have declined as a result, weakening revenue growth.
Young Users Leaving
Teen usage of Facebook has dropped sharply as younger audiences favor Snapchat, TikTok and Instagram. Losing teenage users is worrying as they are the future revenue drivers.
Attracting and retaining young users across its family of apps will be crucial for Meta’s continued growth.
Regulatory Headwinds
Meta faces increasing regulation worldwide around privacy, data usage and competition. It had to pay a $5 billion fine to the FTC in 2019 over privacy violations.
The greater regulatory scrutiny has forced Meta to make changes to its ad targeting and data collection practices. While necessary, this could impact the ad revenue potential.
Reputational Damage and Scandals
Controversies like the Facebook–Cambridge Analytica data scandal have hurt Meta’s brand image. Frequent leaks and whistleblower allegations have compounded reputational damage.
High-profile scandals could make users distrust Meta’s platforms and seek alternatives. Brand reputation matters a lot for user and revenue growth.
Positives for Meta
Despite the challenges, Meta retains some key strengths:
Leading Family of Apps
Meta owns 4 of the top 10 most popular mobile apps worldwide. This includes the top 2 spots occupied by Facebook and WhatsApp. Such strong product market share across categories like social media, messaging and photos gives Meta stability.
Massive User Base
With over 3.5 billion monthly active people, Meta provides unparalleled global scale and reach. Even if user growth slows, Meta has ample monetization headroom just from better ad targeting.
Powerful AI and Algorithms
Meta has world-class AI research teams working on optimization algorithms. Its AI drives the ranking and recommendation engines users engage with. Continued AI innovation will help Meta offer more personalized, engaging user experiences.
Diverse Revenue Streams
Though heavily reliant on ads currently, Meta is expanding into new areas like metaverse, payments, creators, ecommerce, enterprise solutions and more. If some of these pick up, revenue will diversify.
Massive Cash Reserves
Meta is extremely profitable and has built up huge cash reserves of over $40 billion. It has plenty of resources to invest in new initiatives and navigate uncertain conditions.
Meta’s Metaverse Bet
Meta is betting big on the metaverse being the next frontier of social connection. The metaverse incorporates virtual and augmented reality to create immersive digital worlds and experiences.
Meta believes the metaverse will be the successor to the mobile internet. It wants to establish leadership early instead of missing out like with mobile. Meta is investing billions of dollars into its Reality Labs segment consisting of AR/VR hardware, software and content.
Products include Oculus VR headsets, Meta Horizon virtual world platform, avatar creation tools and more. The Quest 2 headset has gained good traction with about 15 million units sold to date.
However, Reality Labs has been incurring steep losses with over $10 billion invested in 2021 alone. Building the metaverse infrastructure and gaining mass adoption will take many years and incur more costs. Meta has warned investors that the metaverse investments will significantly reduce overall profits in the next few years.
If the metaverse bets pay off, Meta could see massive growth in future revenue and users. But that’s far from guaranteed. The metaverse strategy carries execution risks and intense competition from the likes of Apple, Google, Microsoft, Nvidia and others.
Financial Performance and Valuations
Let’s take a closer look at how Meta has performed financially in recent years:
| Metric | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|
| Revenue | $55.8 billion | $70.7 billion | $86.0 billion | $117.9 billion |
| Net Income | $22.1 billion | $18.5 billion | $29.1 billion | $39.4 billion |
| EPS | $7.57 | $6.43 | $10.09 | $13.77 |
| Operating Margin | 45% | 33% | 42% | 43% |
| R&D Expense | $7.8 billion | $12.3 billion | $18.4 billion | $23.6 billion |
Revenue and net income grew steadily from 2018 to 2021. However, operating margins dropped in 2019 due to a record $5 billion FTC privacy fine. Margins have since recovered close to 2018 levels.
EPS dipped in 2019 before rebounding strongly in 2020 and 2021. However, R&D costs have jumped significantly since 2018 as Meta ramped up investments into new areas.
As of October 2022, Meta trades at a P/E ratio of 11. This reflects a steep discount compared to its 5-year average P/E of 22. The market has repriced Meta lower due to its growth struggles. Meta’s forward P/E ratio is even lower at 9, pricing in limited growth expectations.
Competitive Landscape
Meta faces tough competition from several big technology players:
As the market leader in digital ads, Google is Meta’s biggest competitor. Google takes up 29% of global digital ad spend vs Meta’s 24%. Google offers superior ad targeting capabilities and its search ads have higher conversion value. But Meta still dominates display and social media advertising.
Amazon
Amazon is growing into a major player in digital ads driven by its ecommerce dominance. Brands advertise on Amazon to target consumers during product searches and buying journeys. Amazon’s ad revenue could surpass Meta’s in the future.
Apple
Apple’s privacy changes have dented Meta’s ad targeting abilities, giving Apple indirect competitive leverage. The App Store’s policies limiting ad tracking also reduce Meta’s monetization power on iPhones. Apple might expand into more ads over time.
Microsoft
LinkedIn gives Microsoft a strong presence in professional social media ads. The integration of LinkedIn ads into Microsoft’s broader ad stack makes it tougher to compete with. Microsoft also powers productivity and cloud tools used extensively by enterprises who are big ad spenders.
ByteDance
TikTok has exploded in popularity with over 1 billion monthly active users. Its short video format is appealing strongly to young audiences. TikTok’s ad business is still nascent but could take share as it scales up.
Snap
Snapchat pioneered ephemeral social media content and remains highly popular with teens and millennials. Its video advertising formats like Snap Ads and AR lenses are unique from Meta’s offerings.
While Meta still has scale advantages, competitors are chipping away at different parts of its ad dominance. Rising competition across digital ads is concerning for Meta’s growth outlook.
Conclusion
Meta faces some serious challenges currently that have weighed on investor sentiment. Growth has slowed considerably and competition is rising. There are valid long-term concerns around its core ad business. But Meta still possesses strengths like scale, cash flows and optionality in new areas.
Meta stock appears quite cheap based on current fundamentals. The low valuation likely prices in a pessimistic long-term view. Mark Zuckerberg has reiterated that Meta is focused on rebuilding momentum by addressing targeted areas like Reels and discovery engine integrity.
Meta is cutting some peripheral projects and slowing hiring to sharpen focus on key priorities. While near-term headwinds persist, Meta has potential to drive an ad reacceleration through better products. But that will require solid execution. The metaverse strategy also provides an alternative growth avenue, albeit with uncertain outcomes.
In summary, Meta stock appears undervalued today considering its financial profile. The risks appear discounted at current prices for long-term investors. Meta has significant resources to course correct. However, short-term volatility is likely until growth trends stabilize. For investors with a 12-18 month outlook, Meta stock appears attractive at current levels. But near-term uncertainty merits a more cautious hold rating for now.