Facebook rebranded itself as Meta Platforms (META -0.54%) on Oct. 28, 2021. Since that fateful day, Meta's stock declined more than 60% as it repeatedly disappointed its investors with its sluggish growth, feverish spending, and opaque plans for the future. Rising interest rates and other macro headwinds exacerbated that painful sell-off.
That crash stunned many investors who considered Meta to be reliable blue-chip tech stock. Let's compare the main reasons to buy, sell, and hold Meta to see if this out-of-favor tech giant will finally bounce back in 2023.
The main reasons to sell Meta
Before we discuss Meta's turnaround potential, we should review why its stock collapsed over the past year. First, the growth of its core advertising business stalled out for three main reasons: 1. Apple's (AAPL 2.11%) iOS update crippled its targeted ads; 2. ByteDance's TikTok lured users and advertisers away from Facebook and Instagram; and 3. The macroeconomic headwinds disrupted the growth of the broader advertising market.
Meta aggressively invested in the expansion of Instagram Reels to counter TikTok, but it warned that those short videos would be more difficult to monetize than its Feed-based ads. But instead of streamlining its business to offset those costs, Meta doubled down on expanding its Reality Labs segment, which houses its virtual reality products. That segment's revenue rose less than 3% year over year to $1.43 billion in the first nine months of 2022, but its operating loss widened from $6.89 billion to $9.44 billion. During last quarter's conference call, Meta's CFO Dave Wehner warned that the Reality Labs division's operating losses would still "grow significantly year over year" in 2023 as it rolls out its next Quest headset. Wehner also estimated that Meta's total expenses would rise from $85 billion-$87 billion in 2022 to $96 billion-$101 billion in 2023.
That toxic mix of slowing growth and rising expenses drove away the bulls. Analysts expect its revenue and earnings to drop 2% and 33%, respectively, this year. For 2023, they expect its revenue to rise 5% -- but for its earnings to tumble another 15% as its expenses continue to climb. We should take those estimates with a grain of salt, but we should also recall that Meta's insiders sold nearly four times as many shares as they bought over the past 12 months.
The main reasons to buy or hold Meta
The bulls believe Meta's stock is a screaming bargain at 12 times forward earnings. That makes it the cheapest FAANG stock by a wide margin. They'll also note that Meta's recent decision to lay off 13% of its staff, or about 11,000 employees, indicates CEO Mark Zuckerberg is finally ready to make some tough calls to stabilize its near-term margins. In an open letter to his employees, Zuckerberg said Meta needed to "become more capital efficient" to cope with the "macroeconomic downturn, increased competition, and ads signal loss." In addition to those layoffs, Zuckerberg said Meta was also "scaling back budgets, reducing perks, and shrinking our real estate footprint" as it prioritized the growth of its core businesses.
Those statements suggest that Meta will pour a lot less cash into its money-losing Reality Labs division while prioritizing the development of better first-party data mining services (which could reduce its dependence on third-party data from Apple or other operating system providers) and the expansion of Instagram Reels to keep pace with TikTok.
During Meta's last conference call, Dave Wehner said the company was "working to close" the monetization gap between Reels and its higher-value Feed and Stories, but that it could take another 12 to 18 months to do so. That process could be accelerated significantly if the U.S. government finally bans TikTok over its ties to the Chinese government.
Meta's growth will likely remain sluggish over the next few quarters, but the worst-case scenario has arguably been priced in. Meanwhile, the potential tailwinds for the tech giant -- including a revival of its ad business with first-party data, the downsizing (or complete shutdown) of Reality Labs, and a national ban on TikTok -- aren't reflected in its current valuation yet. If the market merely values Meta at 18 times forward earnings, its stock price could easily rise about 50%.
Which argument makes more sense?
I personally think it's too late to sell Meta at these levels, especially if cooler inflation drives stocks higher over the next few months. Meanwhile, investors who already own Meta's stock should probably simply hold it for a few more quarters and see if its business improves or deteriorates. However, I also think it's still too risky to buy Meta's stock before a few green shoots actually appear. Therefore, I believe Meta will be a stock to hold -- instead of being too bearish or bullish on -- in 2023.