Meta Platforms (META 2.33%) is having a rough year so far in 2022. The stock is down 39% in 2022, with the market turning sour on this social media company that's morphing into a metaverse business. Meanwhile, the S&P 500 is down 10% over the same period.
Several significant changes are hurting Meta Platforms, but one thing has yet to change: Billions of people are logging onto its apps. Here's why I think Meta Platforms is a bargain stock right now.
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A growing and lucrative business
As of its most recent quarter, ended Dec. 31, Meta boasted 1.93 billion daily active users across its social media apps (Facebook, Instagram, WhatsApp, Messenger). That was up from 1.84 billion at the same time the previous year and 1.66 billion in 2019. Even at its massive scale, Meta is still adding millions of new users.
As you might already know, its apps are free to join and use. Meta makes money by showing advertisements to users. Importantly, global ad spending was a $763 billion business in 2021 that grew 22.5% year over year. What's more, a growing share of that spending is moving to digital channels. In 2019, 52% of spending went to digital and 64% in 2021. The industry is moving in Meta's direction, and it is ready to capitalize with nearly 2 billion people logging onto its apps daily.
The social media business is a profitable one at scale. In the last decade, Meta has increased earnings per share at a compounded annual rate of 45.9%. And Meta generated an operating profit of $46.7 billion in 2021 on revenue of $118 billion.
Interestingly, Meta can influence sales and profits by changing the frequency of advertisements shown to users. For instance, if it wants to increase sales, it can show more ads per minute to a user browsing its apps. If it wants to improve the user experience, it could decrease the frequency of ads shown.
A low price
Due to the dramatic fall in the stock price, Meta is trading at a forward-price-to-earnings ratio of 16.2, the lowest in the last year. Measuring by its price-to-free-cash-flow ratio of 14.76, it's the lowest it has sold for in the previous five years. Meta is also trading at a price-to-free-cash-flow ratio that is cheaper than those of its social media peers and many other slower-growth businesses alike. So whether you measure Meta's price by its historical averages or against comparables, the stock is cheap.
Of course, there is a reason for the low price. Meta spooked the market in its most recent quarterly report, highlighting headwinds from privacy changes implemented by Apple. It also noted rising competition from TikTok. Citing these obstacles, Meta said it expects revenue growth of only 7% at the midpoint in 2022. That revenue growth would be by far the lowest in the last decade and its first under double digits. Understandably, the market would react poorly to this news. However, it looks as if the market overreacted, which is now creating an opportunity for long-term investors to acquire shares of Meta Platforms at an excellent price.
