Social media specialist Meta Platforms (META -0.52%) has had a rough 2022: Shares of the company have declined 50% since January, a rare fall for a FAANG stock.
The cause? Privacy changes for iPhone users have made tracking users more difficult, while CEO Mark Zuckerberg's ambitious spending (and resulting losses) on the metaverse has Wall Street questioning his plans.
While these concerns have merit, investors risk getting distracted by headlines and not looking deep enough at the numbers. So, I'm going to do this and illustrate why Meta Platforms is a buy today.
Acknowledging the challenges
Meta Platforms gets most of its revenue from advertising to the people using its social media platforms like Facebook and Instagram. Last year Apple implemented changes to its iPhone software that allowed users to block apps like Facebook from tracking user activity across their devices.
It's much harder to effectively serve advertisements if you can't follow users and see their activities and interests. These headwinds caused Meta's price per ad, which indicates how profitable the ad is for Meta, to decrease 8% year over year in the first quarter of 2022.
Meanwhile, the company is investing heavily in its metaverse and VR business it calls Reality Labs. The segment's operating losses were a staggering $10.2 billion, and Zuckerberg emphasized on the company's Q1 2022 earnings call that these investments are laying the groundwork for years into the future, something that might bother an often short-sighted Wall Street.
Meta is still insanely profitable
It's important to acknowledge these short-term challenges because they are real. However, don't let them distract you from how powerful Meta's business model still is. You can see below how the company has still generated nearly $40 billion in free cash flow over the past four quarters, despite the Reality Labs investments and iOS headwinds.
META Free Cash Flow data by YCharts.
Based on the company's $120 billion in revenue, that's a conversion rate of 33%, higher than most businesses you'll come across. Furthermore, Meta Platforms is sitting on almost $44 billion cash on its balance sheet against zero debt.
Plus, Meta is pumping billions of cash back into the business with share repurchases, reducing the number of outstanding shares by 4% over the past year.
Is the stock a buy?
Naturally, nobody likes seeing a low share price. However, shareholders should appreciate the low prices at which management is buying back its stock. The stock has a price-to-earnings (P/E) ratio of just under 13.
The S&P 500 trades at a P/E of just under 20. The S&P 500's historical average growth rate is 10%, while analysts believe Meta Platforms will increase earnings per share (EPS) by an average of 11% per year over the next three to five years. In other words, Meta is expected to outgrow the market, but its stock is comparatively less expensive.
META PE Ratio data by YCharts.
Meta Platforms is an exciting opportunity for investors: The company's struggles create a situation where the stock has become arguably the cheapest it's ever been, despite still generating immense cash profits.
If the company finds a way to overcome the iOS privacy headaches, or Reality Labs begins showing a return on investment, great! That is essentially icing on the cake. But as it stands today, both of those things could never work out, and Meta is still a bargain worth considering today.
