For most of its life as a public company, Meta Platforms (META -1.52%) (formerly known as Facebook) was one of the top growth stocks investors could own. However, since changing its name to Meta Platforms, its stock is down 53% and has plunged into value investing territory.
I'm not insinuating that the name change had everything to do with the plunge. But, the business-model change associated with the name change could possibly be blamed. As Meta pushes all its chips into the metaverse pot, investors have not fared well.
Earnings are falling, but the stock price is falling faster
To illustrate Meta's falling profits, let's look at its trailing-12-month earnings per share (EPS) chart.
As Meta inches closer to having an entire year of being known by its new name and going all-in on the metaverse, EPS has suffered tremendously. In turn, its price-to-earnings (P/E) ratio has plummeted due to a falling stock price. To note: Even though Meta's earnings are falling (the denominator in the P/E ratio), its stock price has fallen much faster, causing its P/E ratio to drop quicker than earnings.
You're reading that chart right. Meta is trading for dirt cheap 13.5 times earnings. To compare, this valuation is less than industrial companies like Caterpillar (14.8) or 3M (17.4). Furthermore, it's significantly less than the S&P 500's P/E ratio of 20.
It's no secret that Meta's stock is absurdly cheap, even with falling earnings. But is Meta a good buy? Or are investors who buy this attempting to catch a falling knife?
Caught up in an economic headwind
There's a good reason Meta's stock price is falling, and it's largely to do with its disappointing quarterly results.
Meta's revenue fell 1% in its second quarter to $28.8 billion. The bottom line was even worse, with EPS dropping 32% YOY (year over year) to $2.46.
Losses are growing because of Meta's spending on its Reality Labs segment (its metaverse segment lost $2.8 billion during the quarter versus revenue of $452 million), but why is total revenue falling?
Like many other companies that derive revenue from advertisements, Q2 was challenging.
Because of economic headwinds, companies are cutting costs, and advertisements are an easy expense to trim. To offset this cut, Meta's price per ad decreased 14% YOY to drive more demand. Decreasing demand and lower prices aren't an excellent combination for any company, but that's what Meta experienced in Q2.
Q3 looks no better, as management guided revenue from $26 billion to $28.5 billion. Compared to last year's Q3 revenue of $28.3 billion, this quarter could mark a significant drop in both revenue and profits.
Looking out to next year, Street analysts project revenue will rise 10.8%, but they think EPS will continue dropping and come in at $9.86, down from the $13.77 projected for this year.
To summarize, Meta's revenue is falling due to a challenging advertising environment, and its operating expenses are rising, causing profits to tumble -- a problem that most likely won't be resolved for at least another two years.
The stock is trading at 16.2 times 2022 earnings and 14.5 times 2023 earnings, suggesting the shares aren't as cheap as their trailing twelve-month valuation, but are still far from expensive and within value investing territory.
Ultimately, it boils down to whether you think Meta can bring its metaverse aspirations to fruition or create a hardware product that becomes a hit with consumers. Meta will have burned billions of dollars for nothing if it can't.
While there may be "better" value stocks out there right now, it's hard to argue against Meta not being included on a list of best value stocks. Once the economic forces affecting advertising recover, Meta's revenue should rise. Additionally, the odds of none of Meta's investments working out is probably low, so there is an unaccounted-for revenue stream in Meta's future.
I think this makes Meta a strong value pick, but investors must be patient.