This earnings season was brutal for Meta Platforms (META -10.56%) and PayPal Holdings (PYPL -1.14%). Meta, the tech giant formerly known as Facebook, has lost about 30% of its market value since it posted a messy fourth-quarter earnings report on Feb. 2. PayPal's stock price has also plunged roughly 30% since the digital-payments provider posted its fourth-quarter earnings report on Feb. 1.
The magnitude of those declines stunned many investors, since Meta and PayPal had been widely considered stable blue-chip tech stocks. Let's see why they crashed -- and if either beaten-down stock is worth buying right now.
Image source: Getty Images.
Why did Meta's stock crash?
Meta's revenue rose 20% year over year in the fourth quarter to $33.67 billion and surpassed analysts' expectations. But its earnings per share (EPS) dipped 5% and missed analysts' estimates. Its largest platform, Facebook, also lost daily active users on a sequential basis for the first time ever.
Meta mainly blamed its slowdown on Apple's new privacy measures on iOS, and warned that those changes could reduce its ad revenue by $10 billion -- or 7% of its projected revenue -- in 2022. It also cited competition from ByteDance's TikTok as another headwind.
Meta's guidance for 3%-11% year-over-year revenue growth in the first quarter also broadly missed the consensus forecast. The company said it would ramp up its spending on lower-revenue short videos (such as Instagram Reels) to aggressively compete against TikTok. It also plans to pump more cash into its unprofitable Reality Labs segment -- which already lost $10.2 billion in 2021 -- to advance its virtual reality and metaverse efforts.
Meta's slowing growth and rising expenses rattled investors. In its subsequent annual report, Meta also warned that it could be forced to withdraw Facebook, Instagram, and its other apps from Europe if it's barred from transferring its data back to its U.S. servers. Meta probably won't actually do that, since it's been building new data centers in Europe to comply with the data privacy laws, but the abrupt warning exacerbated its ongoing sell-off.
Why did PayPal's stock crash?
PayPal's revenue rose 13% year over year to $6.92 billion in its fourth quarter, which beat Wall Street's expectations. However, its adjusted EPS grew just 4% and missed analysts' estimates.
But just like Meta, it was PayPal's guidance that crushed its stock. It expects revenue to grow just 6% year over year in the first quarter and for adjusted EPS to decline 29%. Both estimates were well below analysts' expectations. The midpoint of its guidance for 15%-17% revenue growth in 2022 would also represent a slowdown from its 17% growth in 2021.
PayPal also deactivated 4.5 million illegitimate accounts during the fourth quarter, then withdrew its long-term guidance of hitting 750 million active accounts by 2025. This would have marked a big jump from its 426 million active accounts at the end of 2021.
PayPal blamed its deceleration on supply-chain challenges for merchants, inflationary headwinds, pandemic-related disruptions for travel and event bookings, the lack of new stimulus checks, and slower e-commerce sales. Its decoupling from eBay is exacerbating that pain.
But PayPal management didn't directly address the elephant in the room: competition from other digital-payment platforms. Instead, management said the company would ramp up its investments in its ecosystem, its Venmo peer-to-peer payments app, and its new "super app" for various digital-payment services to widen its moat -- but it expects that elevated spending to reduce its full-year operating margin in 2022. That combination of slowing growth and rising costs spooked investors.
Is either stock worth buying right now?
Both stocks are historically cheap right now. As of this writing, Meta has a forward price-to-earnings (P/E) ratio of 16, while PayPal trades at 27 times forward earnings. But those multiples are pinned to older forecasts and could rise as analysts reduce their earnings estimates.
That said, Meta is still a more compelling investment than PayPal for three simple reasons. First, its entire family of apps (Facebook, Messenger, Instagram, and WhatsApp) still serve 3.59 billion people each month. That massive audience will make Meta one of the world's top digital-advertising platforms for the foreseeable future -- and its growth could accelerate again after it tweaks its ads on iOS devices. PayPal faces a lot more competition in the fintech space than Meta does in the social-networking market.
Second, I suspect that Meta sandbagged its guidance and repeatedly mentioned Apple and TikTok to fend off the Federal Trade Commission's calls to break up the company. Meanwhile, PayPal's full-year guidance for 2022 could still be too high if it doesn't resolve its ongoing problems.
Lastly, Meta's long-term bet on the metaverse might pay off. Horizon Worlds (Meta's free in-house virtual reality, online video game for Oculus devices) seems awkward right now, but it could improve significantly over the long term with hardware and software upgrades. However, PayPal's goal of doubling its annual revenue to $50 billion by 2025 -- which was previously pinned to its ability to hit 750 million users -- is no longer reliable.
Both stocks are risky right now, but Meta's stronger diversification, lower valuation, and wider moat make it a better overall investment than PayPal.
