Meta, formerly known as Facebook, took a nosedive in the stock market recently, with their stock plunging 26% and then 32% amid a four-day losing streak. This followed the company reporting its Fourth Quarter 2021 earnings that fell below expectations and its first decline in Facebook daily active users. Its market value plunged by $237 billion dollars, marking the largest one-day wipeout in U.S. history. In a frantic panic, investors rushed to sell Meta stock, but it’s important to note that Meta is still a profitable long-term investment.
It’s hard to underestimate Meta’s incredible growth since its initial public offering in 2012. Meta has ballooned to one of the largest and most renowned tech companies in the world, boasting unprecedented market power. For years, Meta was valued as a growth stock, but now, their growth is slowing. In its earnings report, Meta lowered its forward forecast for 2022, falling short of analysts’ expectations from $30 billion revenue to $27-29 billion. Declining quarterly profits, stagnating user growth and lower-than-expected revenue all factored in their more dismal outlook for 2022.
The drop in profits is due to Meta’s investment in developing the Metaverse. Meta breaks down its revenue into two segments: Family of Apps consisting of Facebook, Whatsapp, Instagram and Messenger, and Reality Labs — which is their new business that develops virtual reality and augmented reality. The total percentage of their operating income, or their profit after deducting operating expenses, comes from their family of apps segment. Their legacy businesses are becoming more profitable, and revenue from the Metaverse business has been doubling year after year over the past three years. Meta has been investing heavily in Reality Labs in hopes of a potential long-term gain. The Metaverse will continue weighing on the company’s operating margins as the new business took a loss of $10 billion in 2021, with this loss only expected to grow. Executives have already said it could take up to 15 years before Reality Lab becomes profitable.
Another concern is their slowed growth in daily active users due to an oversaturated market with competition from TikTok and Snapchat, as well as Apple’s privacy changes. Facebook’s user base is stagnating and aging, bringing concerns about its appeal to younger audiences when apps such as TikTok have captured their attention. Apple’s privacy changes reduce advertisers’ ability to target users as accurately and threaten Facebook’s core profit model of advertising. However, even with its slowed growth, Meta maintains an enormous user base. Meta has bought out its competitors and effectively maintains a social media monopoly. Across its family of apps, Meta collectively has 2.82 billion daily active users and 3.59 billion monthly users. With the current world population hovering around 7.9 billion, Meta has managed to secure its product usage among 45% of the world’s population so nearly 1 out of 2 people globally use at least one of Meta’s apps on a monthly basis.
Currently, Meta has no debt and generates more free cash flow in a quarter than most businesses do in a year. Looking at the company’s long-term trends, quarter-to-quarter, revenue grew 20% and year-to-year, revenue grew 37%. Net income fell 8% quarter-to-quarter. Year-on-year, profits increased by 35% and free cash flow increased by 60%. These are strong growth numbers for a mega-cap company. Facebook has a strong balance sheet with its 6.3% free cash flow yield and can still deliver long-term returns under the assumption of slowed growth.
There’s no doubt that Facebook still faces an uncertain future. The company is under scrutiny for maintaining an illegal monopoly, following the Federal Trade Commission filing an antitrust lawsuit alleging anticompetitive practices. The company battles controversy after a whistleblower leaked internal documents showing that Instagram was aware of its algorithm that pushed teens and children toward harmful content yet decided not to take action. Meta faces more obstacles as it embarks on an uncertain, expensive, quindecennial transition to the Metaverse. Still, there is no denying the global conglomerate’s strong balance sheet and user base.
However, analysts’ forecasts can be wrong. Projections are based on fundamental and technical analysis of Meta’s stocks’ historical price pattern, but past performance does not guarantee future results, especially since the issues that Meta is facing are not temporary but structural issues. Before investing in any stock, be sure to research and evaluate, and remember that your proclivity to trade depends on your expertise and how much risk you are willing to take on.
