3 Reasons to Buy Meta Platforms, and 1 Reason to Sell

Meta Platforms (META 0.11%), the tech giant formerly known as Facebook, shed more than 50% of its market value this year as investors fretted over its decelerating growth and polarizing plans for the future. The broader sell-off across the tech sector, which was largely driven by rising interest rates and other macro headwinds, exacerbated that pain.

But did investors overreact and prematurely dump Meta's stock, which is still about 330% above its initial public offering price from 10 years ago? Let's review three reasons to buy Meta -- and one reason to sell it -- to find out.

Meta Platforms CEO Mark Zuckerberg. Image source: Meta Platforms.

1. Its advertising business could stabilize soon

Meta generates nearly all of its revenue from its advertising business, which shares a near-duopoly with Alphabet's (GOOG 0.92%) (GOOGL 0.93%) Google across the U.S. and other major markets.

Meta's revenue rose 37% to $118 billion in 2021, but increased just 7% year over year to $27.9 billion in the first quarter of 2022. It expects that slowdown to continue with nearly flat revenue in the second quarter.

Meta attributed that gloomy forecast mainly to Apple's (AAPL -0.82%) privacy update on iOS, which reduced the effectiveness of Meta's targeted ads; intense competition from ByteDance's TikTok; a slowdown across Europe amid the war in Ukraine war, and unfavorable foreign exchange rates.

Those challenges seem daunting, but Piper Sandler analyst Thomas Champion said he believes Apple took a more "accommodative" stance toward advertisers during its Worldwide Developers Conference (WWDC) in early June. Champion noted that Apple didn't tighten its privacy standards again, and it even made a few tweaks to its SKAdNetwork that could open up fresh advertising options for Meta.

Citi analyst Ronald Josey, who reiterated his buy rating on Meta with a $300 price target in early June, said he also believes its advertising revenue growth will accelerate again in the second half of 2022 as the near-term headwinds wane. If that happens, Meta could finally silence the bearish concerns about Apple and ByteDance, and convince investors its advertising business can weather a potential recession.

2. Its slowdown could be temporary

As Meta's revenue growth stalled out, it ramped up its spending on new short videos for Facebook and Instagram, which could eventually widen its moat against TikTok; and its unprofitable Reality Labs segment, which produces its virtual reality (VR) and augmented reality (AR) devices.

The combination of slowing sales and rising expenses spooked investors, and the bears were convinced that Meta's high-growth days are over. As a result, analysts expect Meta's revenue to increase just 7% this year as its earnings per share (EPS) decline by 14%. But if we look beyond 2022, Wall Street's expectations for the following two years are still fairly bullish.

Data source: S&P Global.

We should take those long-term estimates with a grain of salt, but they strongly suggest Meta can continue to monetize its core family of apps (Facebook, Messenger, Instagram, and WhatsApp) with fresh features. That family served 3.64 billion active people in Meta's latest quarter, and that massive audience should remain a lucrative target for advertisers.

3. Low expectations and low valuations

Meta trades at just 14 times forward earnings, making it the cheapest FAANG stock. That low multiple indicates that investors aren't too confident in Meta's ability to overcome its recent challenges.

But the market's expectations for Meta are now so low that any positive developments -- including a stabilization of its advertising business, tighter spending measures at its Reality Labs division, cooler inflation, or other positive macroeconomic developments -- will likely drive its stock higher.

Therefore, it might make more sense to simply buy Meta as a value play than roll the dice on the market's more speculative tech stocks.

The one reason to sell Meta: regulatory headwinds

Meta's advertising business might overcome its recent slowdown, but it still faces unresolved antitrust and privacy probes in the U.S., the U.K., and Europe, as well as ongoing calls to spin off Instagram and WhatsApp into stand-alone companies.

Sheryl Sandberg, Meta's longtime chief operating officer who had steered the tech giant through many of those tough times, also recently resigned and was succeeded by the company's chief growth officer Javier Olivan. It's unclear if Olivan can successfully fend off all those regulatory challenges, many of which could disrupt or throttle the long-term growth of Meta's advertising business.

Is Meta's stock still worth buying?

Meta clearly faces a lot of near-term headwinds, but I don't think its core platforms will ever fade away like Myspace or Friendster. Its apps are still used by nearly half of the world's population every month. And it was still sitting on $43.9 billion in cash and marketable securities in its latest quarter, which gives it plenty of room for fresh investments and acquisitions.

Simply put, I believe Meta's strengths easily outweigh its weaknesses. Its stock won't blast off anytime soon, but its downside potential is fairly limited at these prices. Once its advertising business recovers, it could command a much higher valuation and generate impressive gains for patient investors.