If the recent volatility in the stock market proves anything, it's that investing for the short term is a losing strategy. There's no way to accurately or consistently predict market moves over weeks or months, but history is rich with evidence that in the long run, stocks broadly rise in value.
One of the greatest tech companies in a generation, Meta Platforms (META 0.58%), offers a look into this phenomenon. Over the last six months, its stock price had declined by as much as 51%, mainly because of two key issues highlighted in its 2021 annual report -- though they certainly weren't significant enough to warrant such a steep move lower.
Put simply, Meta's overall fundamental picture hasn't changed very much. In fact, it has a long track record of financial success, which makes the recent dip somewhat irrational. And when the market is irrational, there's only one thing to do: Buy for the long term.
Meta's growth streak
Meta Platforms stock listed in the public markets in 2012. Back then the company was called Facebook, reflecting its flagship social network, but it has since grown to become the largest social media organization in history, adding Instagram and WhatsApp to its portfolio. And now it's turning its attention to the metaverse, a collection of virtual worlds that could usher in a new age of social and professional connections.
In 2012 Meta was already a financial powerhouse, generating $5 billion in revenue that year. But little did investors know it was just getting warmed up, and that figure has since grown by 2,220% to $117.9 billion based on the company's 2021 annual report.
But Meta has also been profitable that entire time, which is a rarity in the technology sector. Its earnings per share, represented by the yellow line in the chart below, have consistently climbed to new heights.
And consistency is precisely the point here. A company that has produced reliable growth in each of the last 10 years -- to the tune of 37% compounded annually -- probably doesn't deserve to have its stock cut in half, especially considering that analysts predict further growth in 2022 with over $132 billion in revenue on the cards.
What went wrong in 2021
There were two primary issues, and they're rather clear-cut. First, Meta's Reality Labs segment, which is tasked with developing the metaverse, lost $10 billion in 2021. That's a really big number at face value, but it represented just 8% of the company's overall revenue for the year, and there's a genuine case that this expenditure should be viewed as an investment. Why? Because some estimates suggest the metaverse will grow to become a multi-trillion-dollar opportunity by the end of this decade.
The other concern involved Apple's changes to its privacy rules, which diminished Meta's ability to target users to sell advertising on its Facebook and Instagram platforms. The company is struggling to navigate the new rules and says they could cost it $10 billion in lost revenue during 2022. That's a notable hit, but again, analysts are anticipating growth anyway.
Meta Platforms stock is incredibly cheap
Based on its 2021 earnings per share of $13.77, Meta Platforms stock trades at a price-to-earnings multiple of just 16 right now. By comparison, the Nasdaq 100 technology index, in which Meta is included, trades at a multiple of 33.
It implies Meta would need to double in value just to trade in line with the broader tech sector.
Investors who purchased at the IPO price of $38 per share in 2012 have received a return of over 500% over the last decade, and with new opportunities like the metaverse in the pipeline, the next 10 years could be just as good (or better).
Therefore, the short-term headwinds that have triggered a plunge in Meta's stock price should be viewed as an opportunity to buy for the long term. After all, looking back at the chart from earlier, few companies are capable of such powerful, consistent growth.