The Market Is Missing This Key Fact About Meta

Facebook parent Meta Platforms (META -4.13%) keeps getting kicked around by the market. In a digital advertising market that is navigating activity tracking changes hastened by Apple, Snap's (SNAP -4.04%) revenue and earnings downgrade in May (which Snap blamed on macroeconomic factors) sent Meta's stock retreating as well. Then on Wednesday, Meta COO Sheryl Sandberg abruptly announced her departure after 14 years, during which Sandberg helped oversee the company's rapid rise as the dominant force in social media. Meta's stock is down 44% year to date.

Sandberg has been instrumental to Facebook's growth story, and she will continue to serve on Meta's board of directors. However, a changing of the guard at the executive level highlights the evolution of Meta from a high-growth tech outfit to a slower-growth company returning excess cash to shareholders. This is not the same company it used to be, but the market seems to be overlooking a $9.5 billion line item from the first few months of 2022.

Image source: Getty Images.

Meta is a "return of shareholder capital" story for now

Meta's revenue growth slowdown is well documented. During the first quarter of 2022, revenue was up just 7% year over year. Second-quarter guidance implies revenue will be within a range of down 2% to up 5% compared to a year ago -- further impacted by Apple's user privacy changes (which make ad tracking and monetization more difficult) as well as a strong U.S. dollar (which lowers the value of revenue from overseas).

Data by YCharts.

Talk about an abrupt halt in top-line growth. In a matter of a couple of quarters, Meta's social media empire has gone from boom to "meh." Though Meta is no Snap, it's no surprise that the smaller and higher-growth social media company's caution due to rising macroeconomic risk (the war in Ukraine, inflation, rising interest rates, supply chain issues, etc.) sent Meta stock down, too. Investors are emotionally fragile at the moment.  

For the record, Snap isn't a proxy for the digital advertising industry. Just days after Snap management's warning, digital ad software platform The Trade Desk said it still expects to reach its own growth forecasts in the quarter. For now, Snap's woes appear to be isolated.  

But there is one place where Meta differs from the rest of the field. It isn't a high-growth tech story anymore, but Meta is wildly profitable. And what it's now doing with those profits is of even greater importance. During the first quarter, Meta used a whopping $9.5 billion to repurchase its own stock. This return of capital exceeded net income and free cash flow for the third quarter in a row as Meta began to give excess cash back to shareholders in earnest via share repurchases.

Data source: Meta Platforms.

But what about the billions spent on the metaverse?

Meta dipping into its massive hoard of cash for share repurchases is significant. The company has reached a new chapter in its existence as its social apps mature and the company begins to nurture new avenues of expansion. Having stayed on for nearly a decade and a half of this chapter, Sandberg's departure at this juncture makes sense.

But what about all this money being spent on the metaverse? After all, Meta is delivering on CEO Mark Zuckerberg's outlook and is on track to incur about $10 billion in operating losses from Reality Labs, the segment primarily made up of the virtual reality business, which racked up $2.96 billion in operating losses in Q1.  

Meta's overall profitability factors for these expenses. No one really knows what the metaverse will look like in a decade, but Meta is bound to learn some things and realize value from its spending spree along the way. In the meantime, the company has the financial firepower to keep spending on this new computing hardware segment and returning excess cash to shareholders. 

I believe the market is missing the big picture here. Meta's advertising business could be headed for further turbulence this year as the economy slows, but this social media empire is far from dead. It's highly profitable, still growing (albeit by a single-digit percentage), and is using gobs of its still very ample cash stockpile to repurchase stock. With a one-year forward price-to-earnings ratio of just 13.5, an awful lot of negativity is already baked into the stock.  

Given an abundance of economic worry, Meta looks like it has exactly the kind of business metrics that will be rewarded by the market right now. I remain a buyer here.