Meta Platforms (META 1.54%) has taken investors for a wild ride over the past year or two. The stock soared through much of 2020 and 2021, riding a boom in digital advertising like other tech stocks, but that gave way to an epic collapse last year as revenue growth ground to a halt, and its ambitious project in the metaverse turned into a massive money pit.
However, the stock has rebounded aggressively this year, doubling in the last few months after Zuckerberg promised investors that 2023 would be a "year of efficiency" and has since announced two rounds of layoffs.
After so much tumult, Meta now appears to be at a crossroads as it cuts costs and realigns its business. So is it a buy today? To answer that question, we asked two of our writers to give their bull and bear cases for the stock.
Image source: Meta Platforms.
Meta Platforms' profitability cannot be ignored.
Parkev Tatevosian: Meta Platforms may be facing a host of meaningful challenges, but that shouldn't deter investors from considering the social media giant turned metaverse hopeful. Rising competition from TikTok, privacy policy changes from Apple (AAPL -0.57%), and the raging war in Ukraine are each hurting Meta's prospects in the near term.
However, I will argue investors are overreacting to those difficulties. Meta's stock is down 54% off its recent highs in 2021. Further, Mark Zuckerberg and his team at Meta have proven adept at finding answers to difficult situations. When people converted their social media use away from computers and onto mobile devices, the market worried Meta would suffer.
Between 2015 and 2022, years of exponentially increasing mobile phone use, Meta's revenue soared from $17.9 billion to $116.6 billion. This revenue growth did not come at the expense of profits like many tech companies. Meta's operating income jumped from $6.2 billion to $28.9 billion in the years mentioned above.
META PE Ratio (Forward) data by YCharts.
It remains to be seen if Meta will take these current challenges and convert them into higher revenue and profits over the next several years. However, at a forward price-to-earnings ratio of 18.9, investors are getting a favorable risk-versus-reward from a company that has proven itself capable.
Too many questions
Jeremy Bowman: I've been impressed with Zuckerberg's ability to take back the narrative in the stock and drive a rebound in the share price, but the company still faces a number of challenges as it attempts to recapture the growth stock magic dust of old.
Those include declining revenue, competition from TikTok, a maturing digital ad market, a massive misjudgment in the metaverse, and the threat of an extended recession.
In other words, Meta is no longer the company it was a few years ago when it was growing rapidly and generating operating margins in the 40% range. However, Meta is unlikely to return to that previous growth rate. In fact, the company has posted a decline in revenue in each of its last three quarters, and it expects revenue to decline in the first quarter of 2023 as well.
While that's primarily due to challenges in the ad market, investors have been anticipating a slowdown in growth for years, which explains the company's formerly cheap valuation. However, now Meta is struggling to make up for the massive cash burn from Reality Labs, its metaverse project. In 2022, the company lost $13.7 billion on Reality Labs, and it's becoming increasingly clear that this was a bad bet as the metaverse has attracted little attention or consumer demand even after the recent release of the Quest Pro. Instead, the company seems to be shifting its attention to artificial intelligence, following Microsoft and OpenAI, the parent of ChatGPT.
Finally, after doubling from its nadir last fall, Meta Platforms stock is no longer cheap, trading at a price-to-earnings ratio of 23, making it more expensive than the S&P 500. After two rounds of layoffs, analysts are now expecting the company to return to bottom-line growth, but that will likely depend on what happens with the economy, and the current banking crisis seems to make a quick recovery less likely.
Given Meta's high valuation, slow growth, problems and the metaverse, and headwinds from the macro-level economy, investors can find better options for their money than the Facebook parent.
