Meta Platforms (META 0.43%) disclosed late Wednesday that longtime executive Sheryl Sandberg plans to resign from her role as chief operating officer. Although the stock price's move downward of roughly 2.5% might not have seemed like a big reaction, news of Sandberg's imminent departure sent shockwaves across the investing community.
Often, major leadership changes become catalysts for strategic change at a company, with significant implications for shareholders. With Meta's stock already having lost more than half its value in just nine months, though, investors could reasonably see the social media giant as a buy even if they don't see Sandberg's departure as a positive.
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Sandberg: A history of hypergrowth
When Sandberg joined the company, then called Facebook, in 2008, the social media giant boasted just 70 million users. During her tenure as COO, Sandberg has helped grow the audience of all of Meta's social media services to 3.64 billion active people as of March 2022. CEO and co-founder Mark Zuckerberg acknowledged the transformative role Sandberg played at the company, saying in a Facebook post that "she deserves the credit for so much of what Meta is today."
The long list of responsibilities Sandberg took on went well beyond what typical COOs do. She scaled up Meta's operations and expanded its global presence. But Sandberg also managed sales, marketing, and business development. She handled legal issues and managed human resources. She took on complex public policy issues, including the privacy controversies that Facebook has faced throughout its history. External communication was also a key element of her job, as Sandberg testified before Congressional committees to defend the company from criticism over the Cambridge Analytica scandal.
Does Meta have the answers to today's big challenges?
Even before Sandberg's decision, Meta was going through a major transition. On one hand, the company had to deal with the trend toward greater use of video in social media, which Meta hasn't been able to monetize as well as its regular feeds. Changes in how Apple handles privacy have resulted in Meta getting less information from users on iOS devices. And more broadly, geopolitical and macroeconomic pressures have had a significant impact on Meta, with the loss of business in Russia compounding weaker conditions in the e-commerce industry worldwide.
Moreover, Meta has taken its own proactive steps forward to embrace a new vision. Massive investments in artificial intelligence as well as its Reality Labs metaverse division will be expensive, and investors don't have high conviction that Meta's strategic direction will prove successful. To foster the transition, Meta has had to focus significantly on building its own hardware, which has traditionally carried much lower margins for tech companies than services.
Meta's transition has raised questions about how the new business will support itself financially. Slowing ad sales held back Meta's revenue growth to just 7% in the first quarter of 2022, and spending on new projects sent net income down year over year.
The bull case for Meta
Meta has a hard road ahead, but the stock's valuation has fallen far enough that its price incorporates a reasonable probability that the company could have to pivot away from its metaverse aspirations. Advertising revenue of $27 billion in the first quarter alone provides massive cash flow for Meta, and even after its hefty investments, free cash flow of $8.5 billion leaves plenty of capital left for future ambitions. Even after an anticipated slump in net income in 2022, the stock still fetches just 16 times its forward earnings estimates, and less than 14 times what it earned in 2021.
Plenty of stocks with minimal growth prospects carry valuations higher than Meta's in today's stock market. To see Meta with a bearish eye now requires investors to assume a greater probability of complete failure for Reality Labs than of even modest success and continued growth in advertising revenue.
Sandberg's departure from the COO role might not make keeping the ad business strong easier. But she'll remain on the Meta board of directors, where her presence should serve as a reminder of how the company got to where it is today. With the momentum that the business model Sandberg helped craft has generated, Meta looks like an attractive stock at today's prices.
