Is Meta a buy?

TL;DR

• Meta’s sharp share price fall recently created headlines for the largest one-day decline in market value historically.
• Some have attributed the correction to concerns about peaking popularity of Facebook and large losses for its Metaverse business.
• However, the real challenges might come from increasing competition from Tiktok and lower ad effectiveness.
• Meta might need to demonstrate a stronger ability to grow its user base and revenue to reverse the discount it trades to peers.

What happened?

What’s the first thing you’d do after waking up? What’s the last thing you’d do before going to bed? Often, it would be to go on one of Meta’s platforms, whether it is Facebook, Instagram or Whatsapp to check for updates. 

It is hence not surprising that Meta is a stock that is widely followed by a lot of investors, and the recent results created a lot of headlines as it came crashing down more than 20% in a single day, losing more than US$250 billion in market value. This also led to Meta setting the record for having the biggest one day drop in value in market history. 

If you think Meta’s recent stock price movement is bad, wait till you take a look at SEA, the parent company of Shopee

What does this mean? 

The sharp fall in share price naturally generated a lot of commentary about why it came down by so much. Here, we look at some of commonly mentioned reasons attributed to the decline, and dispel some concerns that we believe are not warranted. 

Myth #1 – Meta’s popularity has peaked

Source: Washington Post

One of the key concerns is that Facebook has lost users for the first time in its history, as its daily active users fell to 1.929 billion in 4Q21 from 1.930 billion in the previous quarter. This is not the first time that investors have questioned the ability of Facebook to grow its users, as there were similar concerns in 2020 when its daily active users fell for the first time in US and Canada. 

However, it is important to note that Meta owns different platforms, and it might be more worthwhile to look at its family daily active people. This would include the number of users on its Instagram and Whatsapp platforms, which are important to also take into consideration as Meta would be able to generate advertising revenue from them too. On this metric, Meta has continued to grow its users to 2.82 million in 4Q21, even if it is at a slower pace than before. 

Myth #2 – Metaverse losses are bigger than expected

Source: CNBC

With the high profile rebranding of Facebook to Meta in November, it is inevitable that alot of attention is given to the performance of Meta Reality Labs, which includes its augmented and virtual reality (AR/VR) related hardware, software and content. Here, there were several news headlines that reported on the US$10 billion loss made in 2021. 

However, #beansprouters should be aware that what causes a share price to change would be “new” news that was previously not known to investors. It is worth pointing out that Meta had already flagged at its 3Q21 earnings that the investment in Facebook Reality Labs will “reduce our overall operating profit in 2021 by approximately $10 billion”. Hence, this loss should not come as a surprise to the market as well. 

Source: Meta

Challenge #1 – Increasing competition from TikTok

What really spooked the market, was the clear evidence that Meta is facing increasing competition from TikTok. During the earnings call, Mark Zuckerberg mentioned “TikTok” several times, reinforcing his earlier comments that TikTok is “one of the most effective competitors we have ever faced”. 

We all know how TikTok has been taking a lot of attention away from Meta’s social media platforms through its short-form videos which many claim to be very addictive. It is hence no surprise that TikTok was the most downloaded app globally in 2021, exceeding that of Instagram. 

However, competition is not new to Meta. Recall how Snap rose in popularity earlier, and was supposedly an existential threat to Facebook back then? Meta responded by launching Instagram stories, which helped to keep users on its platform. 

In the same way, Meta has responded to the threat from TikTok by launching Reels, which Zuckerberg expects to be “a more central part of the experience”. It would not be surprising to see Reels taking up more of the Instagram real estate and your screen time in future! 

Challenge #2 – Decrease in ad effectiveness

One other issue which has caused a lot of concern, is the loss in advertising revenue caused by Apple’s App Tracking Transparency system. Remember the selection you had to make on whether to allow Facebook to track your data? Yes, that caused Meta to lose US$10 billion in advertising revenue in the past year. 

Source: Meta

It appears that this issue will not be resolved in a very short period of time, as Meta will have to find new ways to improve on its ad targeting. This caused the company to come up with a fairly disappointing guidance for 1Q22 revenue growth of 3-11%, a significant slowdown from the 37% growth seen in 2021. 

On a more positive note, the headwinds faced are not insurmountable. One only has to look across to Snap to see that putting in the right strategy and investments can help to overcome the challenge. Like other social media platforms, Snap had flagged in 3Q21 that changes in Apple policy has led to a slowdown in its ad revenue growth. However, through a change in strategy and expanded offerings to advertisers, it managed to post decent advertising revenue growth in 4Q21 to the surprise of investors! 

What would Beansprout do?

• We’ve seen this before. Recall the US$121 billion of market value wiped out of Facebook in July 2018? Back then this also represented the largest loss in market value in a single day as investors digested the news of rising competition from Snap and falling users in Europe in the wake of the Cambridge Analytica scandal. Facebook was also facing a transition in its product back then as it sacrificed app monetization to drive higher usage and engagement on Instagram stories. 

Source: Guardian

Facebook’s share price continued to fall through most of 2018, and had fallen by close to 40% by the time its share price bottomed in December 2018. What caused the subsequent recovery in share price? Daily active users in Europe started recovering again in 4Q18. 

Source: Google Finance

• Medium term prospects depend on ability to monetise. Despite slowing user growth numbers, Meta has still been able to grow its average revenue per user (ARPU) by close to 14% in 4Q21. This could continue to rise as the average revenue per user in Asia Pacific closes the gap on revenues in developed markets in US and Europe.
• Valuation & share buyback. Meta trades at 17x P/E, lower than the Nasdaq P/E of 24x. Amongst 44 analysts who cover the stock, 41 rate it as a buy. The company has also been aggressive on share repurchases, with US$39 billion available for stock repurchases as of December 2021. 

Feature image credit: nunbun – stock.adobe.com