The technology sector has been under close surveillance recently, as many high-growth companies continue to be pressured by hawkish interest rate hikes in response to exceptionally high inflation. The digital advertising market appears particularly vulnerable as consumers and businesses look to reduce spending in the midst of a stagnant economy.
That trend certainly doesn't serve well for Meta Platforms (META 3.01%), a business that generates almost all of its income via ads at the moment. Mark Zuckerberg's company has witnessed its stock price sink over 50% year to date as the social media firm tries to effectively manage both a tapering ad market and an unprofitable virtual reality (VR) business segment.
That said, should smart investors cash in on Meta Platforms while it's trading at all-time lows? Let's dive in to find out.
Image source: Getty Images.
Where does Meta's business stand today?
Meta Platforms' second-quarter earnings report it delivered on July 27 didn't sit all that well with investors. For the first time ever, its total revenue declined year over year, falling 0.9% to finish at $28.8 billion. Its diluted earnings per share also dropped 31.9% to $2.46. And its operating profit margin crashed 1,353 basis points to 29%, versus 42.5% in the same quarter a year ago.
This patchy top-line growth stemmed largely from a softening digital advertising environment, and the huge hit to its operating margin can be explained by aggressive investments into its highly unprofitable Reality Labs segment.
Reality Labs, which focuses on virtual reality (VR) and augmented reality (AR) hardware and software such as its Oculus Quest 2, is the metaverse side of the business. In Q2, the company spent $8.7 billion on research and development, indicating a 42.6% rise year over year, while its Reality Labs segment generated an operating loss of $2.8 billion, an uptick from its $2.4 billion loss a year ago.
Yes, the company is putting a lot of chips on the future of the metaverse, and at the moment, its investments are exerting significant pressure on its margins. That said, Meta has $40.4 billion in cash and cash equivalents and marketable securities, and it has generated $35.1 billion in free cash flow (FCF) in the past year. So, even if you're not thrilled about the company's metaverse transformation, you're still getting an extensively profitable business with an elite balance sheet and robust cash-flow generation.
But I'd think twice about brushing off the metaverse -- according to Precedence Research, the metaverse market is forecast to expand at a compound annual growth rate (CAGR) of 51% through 2030, up to a monstrous $1.6 trillion. And provided that the stock carries a price-to-earnings multiple of only 12.0 today, well below its five-year mean of 27.9 and the S&P 500's average of 16, Meta Platforms looks like an absolute steal at this time.
Is it time to double down on the social media giant?
Today, Meta Platforms strikes me as the textbook definition of a company dealing with short-term headwinds. But over the long run, I expect the social media king to get back on the horse and continue its growth story. Not only will the company likely have a key role in the metaverse revolution, but it also has a widely profitable advertising business to bank on. This is vastly different than many other fast-growing metaverse stocks that are not yet profitable or cash-flow positive.
Sure, current macro conditions could weigh down the company for now, but Meta has all the resources on hand to bounce back in the years to follow. So the answer is yes -- smart investors should consider buying this stock today.
