What happened
Shares of Meta Platforms (META -2.28%) were down 3% as of 12:07 p.m. ET on Tuesday after one analyst issued a bearish note on the stock. Atlantic Equities analyst James Cordwell sees mounting headwinds for the company that may not lead to a quick recovery for the stock price.
Meta has faced increasing competition from TikTok amid a challenging advertising market, which is how the social media company generates revenue. These concerns have sent the shares down 61% year to date, significantly underperforming the S&P 500 index.
So what
The analyst sees TikTok as a major threat, and clearly so does Meta CEO Mark Zuckerberg. In fact, some high-profile Instagram users have complained about Meta turning the social media app into another TikTok with a heavy focus on short-form video.
Meta reported a 1% year-over-year drop in revenue last quarter. In addition to a slower ad market and competition, management sees a rising dollar cutting about 6% off its revenue growth in the third quarter.
Slowing growth has sent Meta's valuation down to tempting levels. Over the last year, the stock's forward price-to-earnings (P/E) ratio has dropped to just 13.3 times this year's consensus earnings estimate. This is cheaper than the average stock in the S&P 500 index that trades at about 18 times earnings. Don't expect the market to reward the stock to a higher valuation anytime soon, according to Cordwell.
Now what
Meta has to invest to improve its social media experience. In doing so, it may run the risk of alienating some users who don't like the changes. But management sees short-form video as the future of social media engagement and a necessary investment to remain competitive.
The soft ad market shouldn't concern long-term investors, since it's the reality of a weak economy. It comes and goes, but at these low valuation levels, the inevitable rebound in advertising is a major catalyst for more returns. There might be significant upside with relatively low downside at these cheap P/E levels.
