Meta Platforms (META -10.56%) has had an unfortunate year up to this point. The dominant social media platform's stock has plunged 43% year to date, which is quite a collapse compared to the S&P 500 and Nasdaq Composite, which have declined 14% and 24% over the same time period, respectively. The company is struggling in part due to the broader retreat from technology stocks that has resulted from high inflation, the Federal Reserve's decision to raise interest rates in response, and global impacts from the war between Russia and Ukraine.
But the social media company is facing many internal problems as well, and its drastic shift toward the metaverse adds just another layer of risk to its current investment profile. It's important to keep a long-term mindset, however, especially during times of great economic uncertainty. And while Meta's current situation is far from ideal, I think the sell-off has been overdone. This is a stock I see rebounding nicely in the coming years, and one that could provide monstrous returns for patient investors who buy into the company at existing price levels.
Let's dive into Meta's present state and examine why it may offer investors a unique buying opportunity today.
Image source: Getty Images.
Breaking down Meta's business
It's no secret by now: The world's No. 1 social media company is facing an assortment of challenges. On its first-quarter earnings call, CEO Mark Zuckerberg mentioned Meta-specific obstacles like its transition to short-form video, and industrywide hurdles like Apple's iOS privacy changes and softness in e-commerce, that continue to adversely impact the company's growth rates in the near term. At the moment, the company's Reels business, which competes directly with TikTok, monetizes at a slower rate than other segments. That said, Zuckerberg reaffirmed his optimism for Reels and persisted in noting that it's a vital shift for Meta's long-term success.
In Q1, total revenue increased 6.6% year over year to $27.9 billion, and although diluted earnings per share decreased 17.6% to $2.72, the company beat Wall Street's earnings estimate by 8%. The company's operating margin dropped to 30.5% -- down from 43% in the year-ago period and 37% in the fourth quarter of 2021 -- as Meta continues its aggressive investments into the Reality Labs segment. Research and development expense climbed 48.3% year over year to $7.7 billion, and the Reality Labs business remains highly unprofitable for now, generating a loss of $3 billion in the first quarter alone.
On the Facebook platform, daily active users and monthly active users grew a modest 4.4% and 2.9% year over year, up to 2 billion and 2.9 billion, respectively. In fiscal year 2022, analysts estimate total sales to expand 7.4% year over year to $126.6 billion and earnings per share to retreat 13.9% to $11.85. Next year, which is when unfavorable comparable metrics will stabilize, analysts' forecasts tell a different story. Wall Street expects revenue to rise 16.5% to $147.6 billion in fiscal 2023, and earnings per share to grow 18.1% to $13.99.
Short-term headwinds will inflict growing pains on Meta for now, but the company's business is poised to bounce back in the future. And I'm not too concerned about its hefty investments into the metaverse. The social media juggernaut has nearly $15 billion in cash and cash equivalents and generated $8.5 billion in free cash flow (FCF) in Q1. This company is built to last and well-equipped to ride out any economic storm.
Meta's valuation is screaming "buy me"
I'm not sure Meta shares have ever appeared more enticing than now. The stock has a price-to-earnings multiple of just 14.7, representing a significant discount to its five-year mean of 27.9. While growth is expected to be patchy for the foreseeable future, it's challenging to justify such a low valuation today.
FB PE Ratio data by YCharts
This is especially the case when you understand Meta's elite market positioning and untapped potential of the future. Trading almost 50% off its 52-week high, this stock grants investors a robust margin of safety today.
Over the long run, I still like Meta
I'm not overly concerned about Meta's path to a sound recovery. And given its all-time low valuation, I feel comfortable recommending this stock to investors today. By employing a long-term investment approach, you can eliminate much of the noise that is governing the company's share price movement right now. Yes, you may need to buckle up for the near term, but Meta investors should see smooth sailing over the long haul.
