Meta Platforms (META -2.00%) stock collapsed after its recent earnings report.
The price plunged 25% in one session, capping off a year of unprecedented value destruction for the tech giant. The Facebook parent wiped roughly $750 billion off its market cap over the last year as its bet on the metaverse so far has flopped, and its advertising business was clipped by Apple's ad-tracking changes and competition from TikTok.
Still, there are some investors who seem to think that after plunging so far, Meta stock is now a great buy. While there are some worthy arguments for investing in the stock, two of the most popular ones are misguided. If you're thinking of buying the stock, don't do it for either of these two reasons.
1. The stock will soar if Meta quits the metaverse
Looking at Meta's recent earnings report, it's obvious what the problem is. The company is burning massive amounts of cash on its Reality Labs segment. This business devoted to the metaverse lost $3.7 billion in the third quarter and is on track to lose $13 billion this year. For perspective, only a few dozen American companies make that much in profit annually.
Given that hole in Meta's income statement, some investors have argued that Meta shares would soar if the company simply ended its experiment in the metaverse.
While it's true that doing so would greatly improve profits, it's not going to happen, and indulging the idea is a fantasy, distracting from the real challenges the company faces.
For CEO Mark Zuckerberg, who controls the majority of voting rights in the company, reality labs is both a strategic necessity and a passion project, and he's bet his reputation on it.
Zuckerberg has said that what his company is doing with virtual reality is something he's wanted to do since he was a kid, and he also strongly believes that his company needs to own the next computing platform, as much of the company's recent challenges owe to the fact that the mobile-computing platform is owned by rivals Apple and Alphabet.
Meta may succeed in the metaverse, or it may not, but it's not just going to pull the plug on the experiment, especially after it's already dumped tens of billions of dollars into it and even changed the company name. There's no Meta without the metaverse.
2. The stock is cheap
Meta stock is cheap based on almost any conventional metric. On a trailing price-to-earnings basis, the stock trades at a mulitple of just 9, and even based on 2023 estimates, which call for earnings per share to decline to just 12.5, it's still significantly cheaper than the S&P 500.
The problem with buying the stock because it's cheap should be clear from the numbers above. The Facebook parent's earnings are declining, and it's not clear when that decline will end.
Management said that losses in Reality Labs would significantly expand next year, implying that they'll be in the range of $15 billion to $20 billion. From there, management plans to slow its investment in Reality Labs so that it can grow its overall operating income.
That Meta is planning to restrain its losses in Reality Labs in 2024 shows that management is mindful of the cash burn, but it doesn't haven't full control over its profitability. The company faces intensifying competition from TikTok, and Apple's ad-tracking changes made it more difficult for apps like Facebook and Instagram to target ads, making it less valuable to advertisers.
The company is also instituting mass layoffs, cutting over 11,000 people, or 13% of its workforce, which will help it cut costs but also show that it has already significantly overestimated its growth potential, hiring too aggressively.
Meta stock could prove to be cheap, but this isn't a value stock by any means. Those come with predictable cash flows and a proven business model. Meta, on the other hand, will likely never return to its previous level of profits unless Reality Labs is successful.
The company missed earnings estimates in its last two quarters. If it continues to fall short of expectations, the stock will keep falling no matter how cheap it may seem.