Meta Platforms (META 0.82%), the tech giant formerly known as Facebook, has lost 60% of its value over the past 12 months. Part of that decline was caused by rising interest rates and macro headwinds, but investors also seemed to lose faith in Meta's long-term prospects. Should investors consider Meta to be dead money or an undervalued turnaround play? Let's review the bear and bull cases to decide.
Why the bears are betting against Meta
The bears believe Meta will continue to struggle for three reasons: Its advertising business faces existential challenges, it's committed to burning billions of dollars on its experimental metaverse efforts, and it will face intense scrutiny from antitrust regulators for the foreseeable future.
Image source: Meta Platforms.
Meta's Facebook and Instagram are still leaders in the digital advertising market, but they've both been crippled by Apple's (AAPL +0.11%) privacy update for iOS -- which enabled its users to opt-out of data-tracking features -- over the past year. Without that targeted data, Meta's ads become a lot less effective at attracting revenue-generating clicks.
As Apple tightened the screws on Meta, ByteDance's TikTok overtook both Instagram and Snap's (SNAP 5.51%) Snapchat as the top social network for U.S. teens, according to Piper Sandler's latest teen survey. TikTok surpassed a billion global users last year, and has blindsided both Meta and Snap in the booming market for short-form videos. Meta is trying to catch up with Facebook Watch and Instagram Reels, but it could be far too late to close that widening gap.
To make matters worse, inflation, a strong dollar, and other macro headwinds have caused many companies to rein in their ad spending this year. All those challenges caused Meta's growth in advertising revenue, which still accounted for 97% of its top line in the first half of 2022, to hit a brick wall:
|
Period |
2019 |
2020 |
2021 |
1H 2022 |
|---|---|---|---|---|
|
Ad Revenue |
$69.66B |
$84.17B |
$114.93B |
$55.15B |
|
Growth (YOY) |
27% |
21% |
37% |
2% |
Data source: Meta Platforms. YOY = Year-over-year.
But as Meta's ad sales dried up, it continued to expand the Reality Labs division, which houses its VR headsets, AR smart glasses, and Horizon Worlds metaverse platform. Here's how much money that unit lost over the past three and a half years:
|
Period |
2019 |
2020 |
2021 |
1H 2022 |
|---|---|---|---|---|
|
Reality Labs Revenue |
$501M |
$1.14B |
$2.27B |
$1.15B |
|
Reality Labs Operating Loss |
($4.50B) |
($6.62B) |
($10.19B) |
($5.57B) |
Data source: Meta Platforms.
Meta has reportedly postponed and canceled some of its Reality Labs projects to rein in its spending, but the creation of a VR-powered social platform remains one of CEO Mark Zuckerberg's top priorities. However, it can no longer reliably subsidize the expansion of that unprofitable ecosystem with its higher-margin advertising revenue. That's why analysts expect Meta's revenue growth to flatline this year as its earnings tumble 28%.
As Meta's growth decelerates, it faces tougher data-sharing and antitrust regulations in Europe. In the U.S., the Federal Trade Commission (FTC) is also suing Meta and trying to force it divest Instagram and WhatsApp. These regulatory challenges will likely hang over Meta for at least a few more years.
NASDAQ: META
Key Data Points
Why the bulls still believe in Meta
Meta clearly faces a lot of near-term challenges, but the bulls will point out that 3.65 billion people still used at least one of its apps every month in the second quarter of 2022, which represented 4% growth from a year earlier. Meta's ability to continue to gain new users (even though it already reaches nearly half of the world's population) indicates it will remain a default advertising platform for most companies.
Apple's iOS update might have throttled its near-term growth, but Meta is already trying to overcome those challenges by gathering more first-party data and rolling out more video-based ads. The bulls believe that once Meta implements those changes and the macro headwinds wane, its advertising business will stabilize and start growing again.
As for the Reality Labs division, the bulls will tell you that it's already established a first-mover's advantage in the niche VR market. The Quest 2 has become the best-selling stand-alone VR headset in the world with about 15 million units sold since its launch in Oct. 2020, while its new Horizon Worlds platform already locked in 300,000 users earlier this year. Those numbers might seem tiny relative to its main social networking platforms, but they could grow exponentially as it develops better hardware and software over the next few years.
Lastly, Meta's stock trades at just 15 times forward earnings, which makes it the cheapest FAANG stock by a wide margin. If Meta can overcome its near-term problems, it could easily double from its current levels.
Its weaknesses still outweigh its strengths
Meta isn't doomed, but it will likely remain out of favor until it stabilizes its core advertising business. Its stock looks cheap, but its lack of near-term catalysts will prevent it from being considered a turnaround play. I personally own some shares of Meta, but I believe it could remain dead money for at least a few more quarters as this bear market drags on.
