Although Meta Platforms (META 2.54%) shares have been on an absolute tear in 2023, they are still down 31% from their all-time high (as of May 31). Nonetheless, some investors might be ready to hop on the Meta bandwagon in hopes of riding the momentum to superb portfolio returns.
This has always been a controversial stock. That's why it's worthwhile to consider both sides of the argument before even attempting to make an informed investing decision. Let's look at the bear and bull cases for Meta Platforms.
Meta's bears have valid points
In 2022, Meta generated 98% of its revenue from digital advertising. What has been revealed over the past several quarters, however, is just how cyclical the digital ad market really is. Meta's sales declined 1.1% in 2022. And although results in the first quarter of 2023 exceeded Wall Street expectations, revenue increased by only 2.6%.
Heightened economic uncertainty is having a clear impact. "There's a broad range of expectations captured in our Q2 outlook and it reflects that we feel it remains a volatile macro environment," CFO Susan Li said on the Q1 2023 earnings call. This will continue to pressure Meta in the near term.
Bears can point to CEO Mark Zuckerberg's focus on investing heavily toward creating a new virtual world known as the metaverse. The Reality Labs division posted revenue of $339 million in Q1 compared to a $4 billion operating loss. Investors aren't completely sold on the vision, mostly because its success is anything from certain. And a lot of cash will be burned along the way.
"Building the metaverse is a long term project, but the rationale for it remains the same and we remain committed to it," Zuckerberg said on the earnings call. This high-risk bet could be the opposite of what investors want.
Lastly, Meta must always be ready to face newer upstarts that are vying to encroach on its turf. ByteDance's TikTok, now with 150 million monthly active users in the U.S., is a formidable opponent. Technology is constantly changing, which means that Meta can't ever stop finding ways to engage its users.
The bullish case for Meta stock
Even though it's truly a dominant organization today, with 3.81 billion monthly active people (MAP) across the Family of Apps, Meta finds ways to keep growing. In the latest quarter, MAP was up 5% year over year. And the opportunity is huge to increase monetization of users outside the U.S. and Canada, which can propel revenue higher over time.
It's hard to deny Meta's ability to introduce game-changing features that succeed at keeping its users on the platform. Seeing Snap's early success, Instagram launched its own version of Stories, which has become very popular and successful for the business. Moreover, Reels are also performing extremely well in the face of TikTok's threat.
There are also reports that Meta is working on a decentralized rival to Twitter. And perhaps most pressing right now, the business is seriously focused on better using artificial intelligence to improve content recommendations, increase monetization, and work within Meta's data infrastructure. This should position Meta well for the upcoming tech shift.
A positive discussion about this business isn't complete without touching on Meta's incredible profitability. Over the past five years, the company's operating margin has averaged 36.2%. The result is lots of free cash flow (FCF), to the tune of $18.4 billion in 2022. This has allowed the management team to buy back $27.9 billion worth of shares last year. And as of March 31, Meta had $37 billion of cash, cash equivalents, and marketable securities on its balance sheet, with long-term debt of $10 billion. That's a sound financial position to be in.
What's the takeaway for investors?
While both the bear and bull arguments certainly hold merit, the last factor to look at is the valuation. As of this writing, Meta shares trade at a price-to-earnings (P/E) ratio of 32.8. Not only is this much higher than the S&P 500's P/E of 18.4, but it is also a premium to Alphabet's P/E of 27.3. Meta's current valuation is also more expensive than its trailing-five-year average multiple.
The valuation is on the higher end of the equation no doubt, and this might turn some investors away. But considering just how dominant of an enterprise this is, combined with its innovative and forward-thinking mentality and its ability to generate FCF, I think it makes perfect sense to buy Meta stock and hold for the long term.
