meta platform (meta 6.14%) I’ve had a challenging time recently. In 2021, the tech company’s stock will hit a record high of $382. Since then, the stock has plummeted to a low of just $88. The company’s difficult performance and uncertain outlook have alienated most investors.
The stock has more than doubled from its lows recently. Does this mean the worst is over for Meta and is now a good time to buy stock? Let’s find out more.
Meta’s core ad business faces major headwinds
Once the jewel in the crown, Meta’s advertising business is struggling to maintain its previous success.
With the exception of Q1, Meta’s ad revenue was weaker in each quarter of 2022 than in the same period last year. Advertising revenue in the fourth quarter was down 4% to $31.3 billion, and full-year advertising revenue was down 1% year-over-year.
Weak advertising performance has put significant pressure on Meta’s profitability, with 2022 net profit declining 41% to $23.2 billion. Tech companies blamed the poor performance on the negative effects of the economic downturn, competition and changing economic conditions. apple iOS User Tracking Policy.
The silver lining is that the company’s family of apps (Facebook, Messenger, WhatsApp, and Instagram) grew engagement levels in all four quarters of 2022. Total daily active users (DAU) across all apps reached 2.96 billion, while Facebook’s DAU reached his 2 billion. Solid engagement levels suggested that Meta hadn’t lost its relevance yet. Especially after early signs that short video service Reels is gaining momentum among users.
Additionally, the tech company is very focused on improving efficiency in 2023, even after laying off 11,000 jobs in 2022 and restructuring or terminating leases on various buildings. It seems almost impossible.
The path to the Metaverse remains highly opaque
Meta has high hopes for its bet on the Metaverse. The company will spend his $10.2 billion in 2021 and another $13.7 billion in 2022 to gain a foothold in this emerging industry.
But there are two important issues here. First, the Metaverse business (classified under Reality Labs) reports slightly lower revenue in 2022 despite wider losses. Despite huge investments, the low returns may indicate that Meta’s devices have struggled to scale beyond early adopters.
Besides, investors may wonder whether it’s wise for the company to spend so much at a time when the advertising business is facing problems sustaining growth and profitability. In overview, Reality Labs consumed about a third of his 2022 profits in the advertising business.
On the one hand, given its potential, it might seem perfectly reasonable for Meta to invest heavily in this emerging industry. for example, JP Morgan estimates that industry revenues will reach $1 trillion in the next few years. Still, many celebrities are bullish in the metaverse, but this is just one prediction of his. Realizing such numbers would require massive industry adoption, but so far only early adopters are interested.
And even if the metaverse manages to reach the mainstream, it could take significantly longer than expected. In that case, meta’s return on investment (ROI) for these ventures could be much lower than expected, especially if it’s early in the game.
In short, there are too many uncertainties for investors to get comfortable with the metaverse.
Is meta stock a buy?
Meta’s cash cow business is under pressure to prove it can survive (and thrive) in the face of challenges such as competition from Tiktok, changing iOS data policies, and a weakening global economy.
It doesn’t help that Meta’s new venture is subpar in 2022, yet still spending a lot of cash. Conservative investors have little incentive to buy shares in Meta.
Still, contrarian investors may bet on the company if they believe that Meta’s advertising business will recover in the long term, grow further, and that the Metaverse business will generate significant future revenue.
After all, the advertising business is still very profitable, with $29 billion in operating income in 2022. The stock valuation is not very high. Meta has a price/earnings ratio (P/E) of 20. below the five-year average of 25.
For most investors, it’s best to stay on the sidelines for now. However, if you can afford the volatility, consider taking a small position in Meta stock.
Randy Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platform CEO Mark Zuckerberg, is a member of the Motley Fool’s board of directors. JPMorgan Chase is an advertising partner for The Motley Fool’s Ascent.
Lawrence Nga has no positions in any of the mentioned stocks. The Motley Fool has positions in and recommends Apple, JPMorgan Chase and Meta Platforms. The Motley Fool recommends the following options: Apple’s March 2023 $120 Long Call and Apple’s March 2023 $130 Short Call. The Motley Fool’s U.S. headquarters has a disclosure policy.