Is It Too Late to Buy Meta Platforms Stock?

Meta Platforms' (META -0.47%) stock price surged 20% during after-hours trading on Wednesday, Feb. 1, after its fourth-quarter report. The social media giant's revenue declined 4% year over year to $32.17 billion but still beat analysts' expectations by $480 million. Its net income dropped 55% to $4.65 billion, or $1.76 per share, which missed the consensus forecast by $0.48.

For the first quarter, Meta expects year-over-year revenue to range from a 7% decline to 2% growth. That midpoint of that forecast, at $27.25 billion, matched Wall Street's expectations. It also reduced its 2023 spending estimate from $94 billion to $100 billion to $89 billion-$95 billion, said it could keep right-sizing its business, and unveiled a new $40 billion stock buyback plan.

Investors seemed to overlook Meta's earnings miss and focus on the stabilization of its revenue, cost-cutting efforts, and big buyback plans. But with the stock now up about 50% for the year, is it too late to invest in Meta?

Image source: Meta Platforms.

Pivoting from growth to efficiency

Meta generated 97% of its revenue from ads in 2022. It serves up those ads across its "family of apps" which include Facebook, Messenger, Instagram, and WhatsApp. Some 3.74 billion people accessed at least one of those apps monthly at the end of the year, which represented 4% growth from a year earlier. However, its total ad revenue still dipped by 1% in 2022 and represented its first annual decline since its IPO in 2012.

Data source: Meta Platforms. YOY = Year over year.

Meta's growth stalled out in 2022 for three reasons. First, Apple's privacy update on iOS, which enabled its users to opt out of data-tracking features, made it difficult for Meta's apps to craft targeted ads. Second, Meta faced intense competition from ByteDance's TikTok. It countered TikTok with Reels, but those short videos were much tougher to monetize than its traditional ads. Lastly, outsized inflation, rising interest rates, and other macro headwinds caused companies to buy fewer ads.

Meta's Reality Labs segment, which houses its virtual reality headsets and software, also remained a dead weight on its operating margins. In 2022, its revenue declined 5% to $2.16 billion, or 2% of Meta's top line, while its operating loss widened from $10.19 billion to $13.72 billion -- compared to the company's total operating profit of $28.94 billion. 

As a result, Meta's total operating margin shrank from 40% in 2021 to 25% in 2022. If we exclude the Reality Labs segment from both years, its operating margin would have only declined from 49% to 37%. That's why many critics want Meta to shut down or divest the Reality Labs segment, which still hasn't turned virtual reality into a mainstream computing platform yet.

During the conference call, CEO Mark Zuckerberg said 2023 would be a "year of efficiency" for Meta as it spends less on capital expenditures, flattens its organizational structure, removes "some layers of middle management," and deploys AI tools to help its engineers "be more productive." That's why Meta reduced its total expense forecast for the year.

However, Zuckerberg doesn't plan to abandon the money-losing Reality Labs segment anytime soon. During the call, he insisted that "none of the signals" indicate it "should shift the Reality Lab strategy long-term." CFO Susan Li also predicted that its Reality Labs losses would "increase in 2023" to capitalize on the market's "long-term opportunities."

What's next for Meta?

In 2023, Meta will likely focus on resolving its iOS issues with new advertising algorithms that don't rely heavily on third-party data. It will also continue to expand and monetize Reels, which have doubled in quantity across Facebook and Instagram over the past year, to challenge TikTok. An outright ban on TikTok in the U.S., which has been repeatedly proposed by both political parties, could also send content creators and viewers scrambling to Reels.

If Meta resolves those two pressing issues as the macro environment improves, its advertising growth might accelerate again. For now, analysts expect its revenue to rise 4% in 2023, but for its earnings to decline 12% as it continues to prioritize the expansion of Reels and Reality Labs. However, Meta could still stabilize its earnings growth with its cost-cutting efforts and clear those gloomy forecasts. Its new $40 billion buyback plan, which is equivalent to about 10% of its market cap, could also significantly boost its earnings per share (EPS) if its net income growth stalls out.

At $184 per share, Meta still looks reasonably valued at 23 times this year's earnings. Snap and Pinterest, which both face some of the same headwinds as Meta, trade at 68 times and 37 times forward earnings, respectively. However, I also think Meta's forward multiple could remain stuck in the low 20s until it makes more progress toward growing its advertising revenue and stabilizing its operating margins again. Therefore, I don't think it's too late to buy Meta's stock -- but investors should brace for sluggish growth in 2023 until more green shoots appear.