Insights

Meta Has a Bumpy Road Ahead

After hitting its all-time-high price just a little less than a year ago, Meta Platforms, Inc.‘s (NASDAQ: META) stock has headed south over the next few months.

Investors are concerned about whether the company can adapt to new challenges — such as the rise of short video app TikTok and change in iOS’s policy — and the massive (but loss-making) bet on the metaverse.

Meta’s latest result confirms that these concerns are not baseless, as it reported its first decline in quarterly revenue.

Image source: Getty Images.

A challenging time for Meta

The year 2022 is probably one that Meta wishes to forget.

After delivering one of the weakest growth rates in the first quarter of 2022 — revenue grew by a mere 7% — the tech company reported a 1% decline in revenue for the second quarter of 2022. The decrease in revenue was mainly due to a 14% fall in average price per ad, offset by a 15% increase in ad impressions. Besides, expenses rose by 22%, resulting in a 36% plunge in net profit in the latest quarter.

The only silver lining here is that Meta’s daily active users (DAU) across its apps continued to march higher, up from 2.87 billion in the previous quarter to 2.88 billion this quarter. The solid DAU numbers indicate that users remain active on Meta’s platform despite its financial woes.

Still, investors hoping for a quick turnaround would be disappointed as the company guided for another year-over-year fall in revenue for the third quarter of 2022. Worse, the tech giant lowered its full-year revenue target from $87 billion to $92 billion to $85 billion to 88 billion.

All in all, it was an ugly quarter for Meta, and this situation could last for at least a few more quarters.

What’s next for Meta?

The near term looks exceptionally bad for Meta. With global economies weakening and the continued war in Ukraine, it is hard to expect any boost that could turn around the company’s revenue trajectory in the next few months.

Besides, while Reels (Meta’s short video app) is picking up steam — with the time people spent using Reels up by 30% — it will take a while before the app becomes a money spinner for the parent. For perspective, the annual revenue run rate for advertisement on Reels hit $1 billion, a drop in the bucket compared to Meta’s expected revenue of around $88 billion in 2022.

Still, investors have reasons to be hopeful that these challenges will be temporary rather than permanent. After all, Meta still has billions of loyal users and many more billions of cash on its balance sheet. On top of that, the tech company continues to mint plenty of cash — $26 billion in operating cash flow in the first half of 2022. In other words, it has all the necessary resources to turn around its advertising and invest in the metaverse segment.

All it takes is a lot of patience and execution.

Is Meta stock cheap?

One of the primary debates around Meta today is whether the stock is cheap. As of writing, the stock is trading at a price-to-earnings (PE) ratio of 12 times, which is less than half of its five-year average PE ratio of 27 times.

The answer is: It depends.

If you are a bull who believes that Meta’s recent problems are temporary and that it can turn around its advertising business, then Meta’s current price looks quite attractive.

On the other hand, if you think that Meta’s advertising business has peaked and that the investment in the metaverse would likely destroy long-term shareholder value, then today’s share price could still be high.

There is no simple answer to this, and investors must decide to which camp they belong. And for those who can’t decide, it’s best to leave the stock in the “too hard” category and focus on companies they understand better.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Inc. The Motley Fool has a disclosure policy.

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