I've never invested in Meta Platforms (FB 2.17%) (formerly known as Facebook) over the years, and I might be one of the rare older millennials who do not use the company's suite of products.
But at some point, one has to be greedy when others are fearful, as Warren Buffett would say. And while Facebook does not look like a Buffett stock at first glance, its valuation looks extremely compelling at this point, and its prospects seem underrated.
Screamingly cheap
After falling 46% from its 52-week high (including losing over $200 billion of market cap in one day, a stock market record), Meta now trades at a paltry 15 times earnings and an even more attractive 14 times next year's earnings. Within the tech world, Meta is now trading at a cheaper multiple than staid, old-tech companies like IBM (IBM 1.47%) and Cisco (CSCO 0.46%), companies whose investors have bemoaned low growth for years.
Far from a low-growth company, Meta has grown its earnings at a 31% clip annually over the past five years, and is projected to grow them by 36% this year. Meta is even trading at a cheaper valuation than fast-food chains McDonald's (MCD 0.39%) and YUM! Brands (YUM +0.05%). These aren't bad companies, but they aren't coming out with any products that can compete with Meta's Oculus Rift in terms of innovation.
Image source: Getty Images.
One metric paints a very positive picture here. The price/earnings-to-growth ratio, or PEG ratio, was designed to level the playing field and account for the fact that valuing stocks solely based on price to earnings can make high-growth companies seem overvalued -- and that could cause investors to miss out on a great stock by choosing a cheap company with declining earnings instead of a high-growth company that could provide great returns.
The PEG ratio divides the price-to-earnings multiple by annual earnings-per-share growth. In theory, a company with a PEG ratio of under 1 is generally considered undervalued. Meta now has a PEG ratio of 0.7, so it looks incredibly attractive on this metric as well.
Meta is also holding $17.50 in cash per share and has no long-term debt, so it has a rock-solid balance sheet.
What if skeptics are wrong about the metaverse?
Much of the hand-wringing over Meta that caused the stock to plummet after its last earnings call was based on CEO Mark Zuckerberg's plans to invest $10 billion in the metaverse. But could this actually be a shrewd investment by Zuckerberg?
J.P. Morgan recently came out with a report calling the metaverse a $1 trillion annual opportunity. In the report, entitled Opportunities in the Metaverse, the analyst stated that the metaverse will "likely infiltrate every sector in some way in the coming years." If this forecast proves correct, or even halfway correct, Zuckerberg's $10 billion bet may end up looking like a wise investment.
NASDAQ: FB
Key Data Points
Is Meta a buy? Don't count it out
While Zuckerberg's planned metaverse spending roiled the market, the company's valuation is now so cheap that it seems sensible to buy it and wait to see if the company can capitalize on the opportunity the metaverse presents and gain traction with some of its other bets like Facebook Reels.
Newer platforms like TikTok and Snap might have more buzz than Meta, so it's easy to overlook the fact that Facebook is still the No. 1 social media network globally in terms of both numbers of users and in usage time. And advertising spending on the platform is still growing.
For all of these reasons and the advantageous valuation, I view Meta Platforms as a strong buy. I have a feeling that in a few years, this could be one of those stocks that has many investors kicking themselves for overthinking it and not buying it when they had the chance to get it on sale.
