Is Meta Stock A Buy? The Bull And Bear Case After Facebook Parent’s Crash

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Meta stock finally bounced on Wednesday after plunging 32% in four sessions after Facebook’s parent, Meta Platforms, offered a muted revenue outlook for 2022 as corporate challenges multiply. Even as Meta is spending — and losing — big bucks on its ambition to shape the metaverse, its cash cow of mobile advertising is getting squeezed on multiple fronts.




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Meta stock has suddenly become a topic of fierce debate: Bulls say Wall Street dramatically overreacted to a modest-to-moderate shift in Q2 revenue guidance. Bears say that Facebook’s first-ever dip in global users is a sign of worse to come.

One thing is clear: Meta has now reset expectations, so the bar to surprising on the upside is much lower. But is it a good time to buy Meta stock?

Facebook’s Problems Multiply

On top of Apple’s privacy change that has made online ads less effective, Meta’s earnings announcement raised additional concerns that could weigh on growth. The biggest: “We believe competitive services are negatively impacting growth, particularly with younger audiences,” CFO Dave Wehner said in Wednesday’s Q4 earnings call. TikTok was the only competitor mentioned by name.

Trying to combat the TikTok threat and up its game with young adults has created another headwind to Meta’s earnings power. Meta is now focused on driving user engagement via its Reels short-form video feature, yet there are “relatively few ads in Reels today,” Wehner said.

While Meta expects that Reels will prove fertile ground for monetization, that will take time. Meanwhile, Reels growth will weigh on overall results, since it will mean less growth for more ad-heavy News Feed and Stories formats.

Apple Costs Meta $10 Billion

Facebook, which announced a name change to Meta on Oct. 28, had spent much of the past year discussing the challenge created by Apple’s privacy change starting with its iOS 14.5 update last spring. Apple now requires apps downloaded through the App Store to let users opt in or out of tracking their activity across third-party sites. With the bulk of users opting out, businesses are less able to narrowly target advertising to consumers likely to be interested in their products or services.

“We believe the impact of iOS overall as a headwind on our business in 2022 is on the order of $10 billion,” Wehner said.

The brunt of the hit to year-over-year growth is likely to be felt in the first half of 2022, since the impact of the iOS change wasn’t really felt until the second half of 2021.

Meta is working on changes to make its ad-targeting more effective, despite the impact of privacy-related changes. But using artificial intelligence to predict consumer interest as a substitute for tracking user activity isn’t a quick fix.


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Meta Earnings, Growth Outlook

Meta reported Q4 adjusted EPS of $3.67, down 5% from a year ago and below estimates of $3.85. Higher expenses played into the earnings miss. Revenue grew 20% to $33.67 million, roughly in line with the consensus.

Meta’s Reality Labs division, focused on growing the metaverse via augmented- and virtual-reality headsets and software, lost $3.3 billion in the quarter on revenue of $877 million.

Meta’s Family of Apps, including Facebook, Instagram, WhatsApp and more, had operating income of $15.9 billion on revenue of $32.8 billion.

First-quarter guidance calls for revenue in the range of $27-$29 billion, equating to 3%-11% growth vs. the year-ago period. Analysts had expected revenue of $30.2 billion.

Meta Stock Analysis

Meta stock cratered 26% on Feb. 3 and continuing to slide the next three sessions. Shares hit a 19-month low of 216.15 on Feb. 8, 44% off its Sept. 1 record high. Meta stock set a 52-week closing low of 219.55 on Feb. 12.

Meta stock, still known to many as FB stock, will change its ticker to META in the first half of 2022. FB stock was a market leader through August, as indicated by its rising relative strength line, which tracks its progress vs. the S&P 500. However, the downtrending RS line — which long preceded its earnings warning — had offered a warning sign for investors not to go fishing for a bargain.

Facebook stock came under pressure after its Sept. 22 blog post warning of a “greater impact” from Apple’s recent iOS updates. Then pressure built on FB stock as members of Congress launched a probe based on the Wall Street Journal’s Facebook Files series, informed by thousands of pages of documents from whistleblower Frances Haugen.

Meta stock’s 50-day moving average crossed below its 200-day line in December, another technical warning sign.

Still, FB stock had weathered broad market volatility and even briefly regained its 50-day line ahead of its Feb. 2 earnings. Then the bottom fell out, once again demonstrating the danger of buying a stock ahead of earnings.

Analysts React To Meta Stock Crash

JPMorgan analyst Doug Anmuth cut his Meta stock price target to 284 from 385, writing that the company is “embarking on an expensive, uncertain, multi-year transition.”

Loop Capital analyst Alan Gould cut FB stock to hold from buy, slashing his target to 230 from 380. He sees a modest decline in Facebook users as a warning that current pressures may compress profit margins and prove hard to turn around.

Some other analysts noted that Facebook has been through challenging transitions before and always bounced back. Credit Suisse analyst Stephen Ju highlighted untapped monetization potential of WhatsApp and Messenger. He kept an outperform rating for Meta stock, though slashing his target to 336 from 430.

MKM analyst Rohit Kulkarni took it as a positive that Meta stock’s price — after the crash — fell to about 14 times expected forward earnings. That’s just where it bottomed in December 2018, he says. He kept a buy rating, while cutting his target to 365 from 395.


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Facebook’s Metamorphosis

Facebook’s Oct. 28 name change to Meta made sense for multiple reasons. It’s probably no coincidence that it happened as Facebook was being treated as a political pariah, alleged to profit from pushing politically divisive content and harming vulnerable teens. The name change also may have been a bid to get distance from Facebook’s less-than-cool image among young people. “You won’t need a Facebook account to use our other services,” CEO Mark Zuckerberg said in introducing the Meta name.

But the Meta name also speaks to Zuckerberg’s broader ambitions to lead social networking into the “next frontier.”

That frontier will be three-dimensional, allowing for immersive experiences. “The defining quality of the metaverse will be a feeling of presence — like you are right there with another person or in another place,” he wrote.

“Our hope is that within the next decade, the metaverse will reach a billion people, host hundreds of billions of dollars of digital commerce, and support jobs for millions of creators and developers.”

One more key reason Zuckerberg wants to produce the hardware for that next frontier: He wants to help set the rules, rather than have the likes of Apple set standards.


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Meta Stock: Semi-Bullish Case

The first thing to remember is that Meta’s growth warning at least partly reflected management’s decision to sand-bag results. Instead of promoting featured content that is ad-rich, the company will promote Reels short-form video content that is largely ad-free at the moment, having only launched in mid-2020.

Meta is doing this for strategic reasons as it aims to compete with TikTok, the go-to site for posting creative short videos. Meta is “focused on getting the user experience right” as it innovates ad formats on Reels, finance vice president Susan Li said. Still, there was no hint that the ad ramp won’t be successful.

Panic about Facebook’s dip in daily active users to 1.929 billion from 1.930 billion seems premature, given the ups and downs of online use as Covid waves come and go. Meta also highlighted a rise in data costs in India, which has been a strong growth market, as having a negative effect.

Zuckerberg mentioned competition from TikTok five times on the earnings call. Undoubtedly, TikTok has an enviable franchise that Meta can’t let go unanswered. Yet it may be no coincidence that Meta is playing up the TikTok threat in the first earnings call after a federal judge rejected the company’s motion to dismiss the FTC’s antitrust suit.

Meta is playing a long game here, and those long-term interests may have been served by near-term weakness.

Meta Stock: Semi-Bearish Case

The FTC alleges that Facebook’s 2012 and 2014 acquisitions of Instagram and WhatsApp, though approved by regulators at the time, were illegal bids to entrench its monopoly power over personal social networking services. The FTC’s defined market — basically online platforms for connecting with friends and family — doesn’t include TikTok. However, Meta argues that the FTC’s defined market doesn’t reflect the reality of the marketplace.

One possible data point in support of the FTC’s definition of Facebook’s monopolized market: When Facebook’s site crashed in October for about six hours, data showed that rivals like Snapchat saw a surge in usage, but TikTok saw only a minimal increase.

U.S. District Judge James Boasberg wrote that “it’s anyone’s guess” whether the FTC will prevail. The potential for a reversal by the Supreme Court also clouds the case, which could take several years to play out. However, a sum-of-the-parts analysis has become more important in putting a long-term value on Meta.

That sum-of-the-parts valuation looks less compelling given Meta’s current issues, including its big spending on the metaverse. The loss of ad-targeting ability based on users’ online activity makes the combination of Facebook and Instagram even more important, as does the competition from TikTok. Facebook’s “uncool” issues also could dampen its attractiveness as a stand-alone property.

Meta Stock: Is It A Buy?

Meta has gotten a lot of bad news out of the way and tried to downplay hopes for a quick turnaround. But Meta’s woes stand out even more next to good earnings news from Google and Snap, which both surged on their results.

Meta’s current transition to Reels monetization differs from earlier transitions, like the shift to Stories, because it comes as user growth has run out of steam and competitive threats grow. That makes it harder to have faith in the strength of Facebook’s rebound.

Bottom line: FB stock, soon to be MVRS stock, is not a buy.

Be sure to read IBD’s after-the-close The Big Picture column each day to make sure growth investors have a green light.

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