The last 12 months have been a difficult period as an investor in Meta Platforms (META -1.52%).
At one point, everyone was cheering, thanks to positive news like record revenue and the pivot toward the metaverse. Very soon, however, everyone started worrying about the company's slower revenue growth and weak guidance.
Here, I will dig further into what the bulls and bears say about the company.
What the bulls are saying
Investors are always looking for the next big thing that could replace Facebook, Instagram, and WhatsApp. Is it a short-video app, TikTok, or another social networking app like Telegram?
While the threats are always there, let's clarify one thing: Meta is still the world's most prominent social networking company, with 3.6 billion monthly active users (MAU) -- MAUs have grown every quarter over the last eight quarters. It will take a while -- if ever -- for any competitor to catch up.
Meta is also highly profitable. In 2021 alone, it generated $118 billion in revenue (up 37% year over year) and $39 billion in net profit (up 35% year over year).
By offering a utility-like service across its Facebook family of services (Facebook, Messenger, Instagram, and WhatsApp), the tech company keeps its billions of users returning daily. As users spend valuable time talking to their family and friends, reading news, consuming entertainment, and more, advertisers will continue to spend money on Meta.
On top of that, Meta stock is trading at an inexpensive valuation. As of this writing, the stock trades at a price-to-earnings (P/E) ratio of 13. This ratio compares favorably to the five-year average of around 28. A highly profitable business trading at a significant discount makes the stock compelling to the bulls.
What the bears are saying
Meta's stock might be trading at a discount, but there are reasons why.
External challenges make Meta's business less attractive today than it was many years ago. Topping the list is the threat of competing services, such as TikTok's short-video service, which diverts user time and attention. While the incumbent is retaliating with its short-video app Reels, there is no guarantee that it can stop the user migration.
Besides, the intensifying geopolitical situations -- such as the Ukraine war -- and the raging inflationary environment also impacted Meta's advertising business. These challenges might explain the recent weak revenue growth rate of 7% year over year in the first quarter of 2022. For perspective, full-year revenue grew at 37% in 2021.
Another concern for investors is Meta's strategic decision to bet the ship on the metaverse. In theory, the shift makes perfect sense. After all, there seems to be no limit to the potential of the metaverse, which, if successful, will create a whole new income stream for the company. Management is betting heavily on this young venture, investing more than $10 billion alone in 2021.
But make no mistake: Meta's bet on the metaverse remains a moonshot. Nobody knows how this industry will evolve or the company's role in this new industry. Moreover, while Meta can afford to spend heavily -- thanks to the profitability of its advertising business -- it is far from certain that these investments will create value for shareholders in the long run. Worse, this new venture could take too much of management's attention, causing them to neglect the existing golden goose.
There are good reasons to be positive and negative about Meta.
On one end, the tech juggernaut is seeing slower growth amid a challenging external environment and competition from short-video companies.
Yet, the core social networking business (Facebook, Instagram, Messenger, and WhatsApp) is still highly lucrative. Besides, the investment in the metaverse -- even though costly -- offers optionality for the company.
On balance, I think the pros and cons offset each other. My take toward Meta is neutral: It's neither a compelling buy nor a complete sell.