Meta Platforms (META -4.13%), the parent company of popular social media apps Facebook, Instagram, and WhatsApp, reported its full-year 2021 earnings on Feb. 2. Investors were not at all happy about the significant cash burn in the company's Reality Labs segment, which is focused on building the metaverse, and in the weaker-than-expected forward guidance.
Meta's stock price fell 22% in after-hours trading following the report's release (and has stayed down), but there are strong arguments in support of investors buying into that weakness. The company's impeccable track record of financial performance suggests it deserves the benefit of the doubt, especially given the opportunities ahead.
Here are two key reasons to buy this dip.
Image source: Getty Images.
1. The huge potential of the metaverse is worth the billions being invested
Meta Platforms is the largest social media company in the world, with its Facebook asset alone used by 2.91 billion people every month -- a startling 36% of the entire global population. But still, the company refuses to slip into complacency, as evidenced by its sizeable (and increasing) investment in the metaverse.
This new virtual world is being constructed by Meta's Reality Labs segment, which the company now reports separately from the rest of its platforms. It believes that in the future, its users will exist as virtual avatars of themselves within the metaverse, where they can teleport to different experiences and carry inventories of digital goods. That presents a significant financial opportunity for Meta Platforms, because the metaverse could feature its own self-sustaining economy.
But when the company revealed its fourth-quarter 2021 result, investors were surprised at just how much money was being spent on this project.
|
Metric |
2019 |
2020 |
2021 |
|---|---|---|---|
|
Reality Labs Net Loss |
($4.5 billion) |
($6.6 billion) |
($10.1 billion) |
Data source: Meta Platforms.
While it appears the Reality Labs segment is bleeding an increasing amount of red ink, Meta Platforms is playing the long game. One estimate by Bloomberg Intelligence suggests the metaverse will be an $800 billion opportunity by 2024, with a 12.4% compound annual growth rate (CAGR) that could see it double to $1.6 trillion by the end of this decade alone. Therefore, in context, the $10.1 billion Reality Labs lost during 2021 could be a mere drop in the ocean compared to its future revenue potential.
2. The stock is a great value
Despite Meta's substantial commitment to building the metaverse, the company as a whole is making a significant amount of money. For the 2021 full year, it reported $39.3 billion in operating income, which translated into $13.77 in earnings per share.
Its stock trades at $239 right now, placing its price-to-earnings multiple at just 17.1. That's 50% cheaper than the technology-centric Nasdaq-100 index, which trades at a multiple of 33.7. Meta has a stellar track record of revenue and earnings growth over the last decade, which likely warrants a much richer stock valuation.
|
Metric |
2011 |
2021 |
CAGR |
|---|---|---|---|
|
Revenue |
$3.7 billion |
$117.9 billion |
41% |
|
Earnings per share |
$0.46 |
$13.77 |
40% |
Data source: Meta Platforms. CAGR = compound annual growth rate.
But putting the past aside, the short term might be bumpy as Meta contends with recent changes to user privacy policies for Apple's iOS and Alphabet's Google Andriod OS, which are making it harder for advertisers to accurately target their desired audiences. That, combined with lingering supply chain issues hurting businesses' appetite to spend on marketing, prompted Meta to issue conservative guidance for the first quarter of 2022.
There is another concern. Facebook saw its first sequential quarterly decline in daily active users in company history, and although it was a mere 0.05% contraction in user base, it highlights the difficulty in generating growth for a single platform with over 1.9 billion users. But on the plus side, Meta recorded an average revenue per user of $9.39 for the fourth quarter, its highest in at least two years.
Investor takeaway
Meta is an incredibly innovative company, so issues like ad targeting and short-term supply chain issues will likely be overcome given enough time. It favors a long-term investment approach, especially given the opportunity in the metaverse that lies ahead. If the new virtual world grows as large as some estimates suggest, the company's future financial performance could trounce anything it has achieved in the past. Therefore, picking up Meta Platforms stock on this dip could be a game-changer for your portfolio.
