Few companies in the history of the stock market have undergone as dramatic of an implosion as Meta Platforms (META -1.12%), the parent of Facebook and Instagram.
From its peak at $382.18 last September to its trough at $88.09 shortly after its recent earnings report, the tech giant lost 77%, or more than $750 billion in market cap.
In a little more than a year, Meta has gone from a fast-growing, highly profitable and dominant social media advertising machine to a business in the middle of a questionable pivot to the metaverse whose core social media enterprise is suddenly unraveling.
With that sell-off comes a potential opportunity as Meta shares certainly look cheap according to conventional metrics. Meta shares currently trade at a price-to-earnings ratio of just 10.7. But is Meta stock a buy? Let's examine what the tech giant has to offer investors today.
Image source: Meta.
The simple facts
Comparisons to the company that was once known as Facebook are moot. That company is gone.
Meta is moving aggressively into its metaverse project, internally called Reality Labs, and is perhaps more than any other company in history, investing a colossal sum on an unproven concept that brings in almost no revenue at this point.
In the third quarter, Reality Labs had an operating loss of $3.7 billion, giving it an annual run-rate loss close to $15 billion. Through the first three quarters of the year, Reality Labs has lost $9.5 billion, meaning the division focused on virtual and augmented reality will likely lose at least $13 billion this year.
Meta management also said that losses in Reality Labs would significantly expand next year, so investors should expect it to lose $15 billion to $20 billion, if not more.
However, the company does recognize the need to control spending. On Nov. 9, the company said it was laying off 11,000 employees, which includes people in Reality Labs. CEO Mark Zuckerberg also said the company was looking to rein in infrastructure spending and make it more efficient. At least some of that infrastructure spending is devoted to Reality Labs.
After the layoffs announcement, Meta trimmed its expense guidance for 2023 by $1.5 billion, though it's unclear what percentage of that will come from Reality Labs.
Meta also promised to control spending in Reality Labs starting in 2024 with the aim of growing total operating income, showing its willing to impose limits on the metaverse experiment.
Mounting challenges in social
While the wide losses in Reality Labs have been expected, what's arguably more shocking about its recent performance is how its momentum with its social media apps (Facebook, Instagram, WhatsApp, and Messenger) has died.
Revenue in its family of apps, as that segment is known, actually fell in the third quarter, declining 4% to $27.4 billion. Worse, operating income tumbled 28.5% to $9.3 billion as ad rates have fallen, the company is still adjusting to Apple's ad tracking restrictions, competition from TikTok has stolen screen time, and macroeconomic headwinds are also weighing on ad demand.
The good news for investors is that the worst of the Apple-related headwinds have now passed. The iPhone-maker has started to roll out those changes, but with macro headwinds seemingly picking up, the company expects another decline in revenue in the fourth quarter.
Is Meta a buy?
In his letter to employees announcing the layoffs, Mark Zuckerberg seemed to say that he thought the stock was undervalued:
"I believe we are deeply underestimated as a company today. Billions of people use our services to connect, and our communities keep growing. Our core business is among the most profitable ever built with huge potential ahead. And we're leading in developing the technology to define the future of social connection and the next computing platform."
That may be true, but Meta has a lot to prove before investors will believe it. At the moment, Meta's VR headsets and its other metaverse products, like its VR Horizon software, seem to lack product-market fit. Any demand for these products doesn't seem close to what Meta is spending on it.
In social media, meanwhile, it expects Reels, its TikTok copycat product to begin to ramp up ad revenue, which is a promising sign. However, the company's iron grip over social media is clearly loosening with TikTok's rise, and that problem could get worse.
In order for the stock to be a buy, Meta has to do at least one of two things. It needs to return the social media business to solid growth on the top and bottom lines, or it needs to demonstrate a market for Reality Labs, and that second component may be even more important in the long run.
Until Meta can show that at least one of its two businesses is moving in the right direction, investors are better off sitting on the sidelines.
