As of this writing, the Nasdaq Composite is down nearly 9% on the yearand 13% from its all-time high. That drop puts the Nasdaq in correction territory, which is defined as a decline of 10% or more.
But the Nasdaq still isn't in full-blown market crash territory, which is usually defined as a rapid drop of 20% or more, whereas a bear market is a prolonged period where the market is down 20%.
Still, there are plenty of former market leaders that are down even worse than the Nasdaq, such as Meta Platforms (META +0.58%), which tumbled 14% in the last month.
Here's why Meta is a high-conviction growth stock to buy even if the broader indexes keep sinking.
Image source: Getty Images.
Meta is in a league of its own
When the stock market is volatile, it's easy to get caught up in the noise and confuse price action with value. But a stock's price merely represents a snapshot of investor sentiment. So a better approach is to zoom out and consider a company's market positioning and long-term growth prospects.
The Meta Platforms family of apps, which includes Instagram, Facebook, and WhatsApp, is increasingly the go-to destination for advertisers simply because engagement has soared, especially on Instagram.
Instagram started as a virtual photo gallery for staying connected with friends and family. But now, its most valuable aspect has nothing to do with photos. It's all about short-form videos (Reels), which can come from accounts that the user follows or are simply discovered and swiped through a feed.
NASDAQ: META
Key Data Points
Advertisers using Reels can cater to accounts with a higher chance of being interested in what they sell based on user search preferences. Instagram is also used increasingly as a search tool, taking market share from Alphabet's Google Search. And because Instagram is a mobile-first application, whereas Alphabet's YouTube is a desktop-first application, Instagram is arguably the best use of advertising dollars for mobile.
Meta stock has undergone a results-driven rally
Meta's growth is nothing short of jaw-dropping. Revenue and earnings took a hit in 2022 and 2023 but quickly rebounded to all-time highs. The stock followed suit, but has sharply pulled back recently.
The vast majority of Meta's revenue comes from advertising. So the company is vulnerable to economic cycles. There's also a bit of a perception issue to consider.
When Meta's sales and profits are roaring higher, it's easy to overlook the elephant in the room: the billions of dollars Meta loses every quarter from its Reality Labs (research and development) division, which invests in augmented reality, virtual reality, and other products. In 2024, Meta lost a mind-numbing $17.73 billion on Reality Labs, which impacted its income from operations by 25%.
Only a handful of companies can absorb that kind of loss and still be incredibly profitable. But during market sell-offs -- and especially bear markets -- investors tend to focus more on where a company is today than where it is going. The slack may tighten to the point where investors will no longer put up with Reality Labs' losses.
Meta is an excellent value
Meta is a highly profitable business that continues to take market share. However, it's also the kind of stock I could see falling a lot during a broader sell-off because its results can be cyclical, and Reality Labs continues to suck profit from the advertising business.
Still, Meta is the exact kind of company that's worth scooping up during moments of market volatility. Despite increasing by several-fold over the last few years, the stock is still cheap -- sporting a price-to-free-cash-flow (FCF) ratio of 29.2 and a price-to-earnings (P/E) ratio of 25.3. Surprisingly enough, Meta trades at a discount to the S&P 500 -- which has a P/E of 27.8. Even if Meta's earnings fall in the short term, the business should continue to be able to compound earnings over time. So for long-term investors, the valuation is a compelling reason to own the stock.
Another attractive aspect of Meta is its balance sheet. Meta finished 2024 with $77.81 billion in cash, cash equivalents, and marketable securities compared to $28.83 billion in long-term debt -- giving Meta a net cash position of around $49 billion. It would be one thing if Meta was funding its artificial intelligence (AI) spending and Reality Labs projects with debt. But it is using FCF from the businesses on those endeavors (Meta earned $52.1 billion in 2024 FCF).
So even if FCF came down, Meta could easily invest in long-term projects by leaning on its balance sheet. This advantage allows Meta to invest through the cycle (and likely take market share), precisely the quality that can compound earnings growth over time.
Meta is a coiled spring for long-term growth
Meta's stock price could do just about anything in the near term. But that volatility doesn't detract from the company's elite business model.
Out of all the megacap tech stocks, Meta and Nvidia have undergone arguably the biggest changes in recent years. Reels transformed Instagram's ad model, while Nvidia's graphics processing units for data centers took off and became the main driver of the business (as opposed to gaming and graphics).
Long-term investors shouldn't mind if Meta sees a slowdown in ad sales for cyclical reasons. But if Meta is losing market share due to a superior product, that's more of a red flag. Given that there's no evidence to suggest Instagram's long-term growth is in jeopardy, Meta remains an excellent long-term stock to buy now, especially if its valuation continues to plummet due to a stock market sell-off.
