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It is not the right moment to look for Meta stock deals right now

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It is not the right moment to look for Meta stock deals right now

After slumping in the first half of 2022, Meta Platforms is destined to bounce back in the long run.

The latest stock market correction has adversely affected even the most dominant tech companies. Shares of social media titan Meta Platforms (META -2.93%) have tanked 51% since the beginning of the year. High inflation, a rising interest-rate environment, and the war in Ukraine have triggered a massive shift away from technology companies and into safer assets like bonds and value stocks.

While the Mark Zuckerberg-led business is facing its fair share of headwinds at the moment, investors should feel confident that the company will rebound nicely in the long run. On that note, here are three reasons why shrewd investors should invest in the social media king right now.

It is not the right moment to look for Meta stock deals right now

Meta runs a hearty business

After delivering a subpar earnings report to close out 2021, Meta recovered nicely in its opening quarter of this year. Total revenues grew 7% year over year to $27.9 billion, in line with Wall Street estimates. Diluted earnings per share contracted 17.6% to $2.72, beating consensus forecasts by 8.1%.

Daily active users on the Facebook platform expanded 4.4% to reach 1.96 billion, and monthly active users rose 2.9% to 2.94 billion. In the earnings call, Zuckerberg mentioned a mixture of growth headwinds at the moment, most notably, Meta’s transition to short-form video, Apple‘s iOS privacy changes, softness in e-commerce, and harmful side effects from Russia’s invasion of Ukraine.

These obstacles appear very short term in nature. I still see a business that serves over one-third of the global population on a monthly basis, boasts $14.9 billion in cash and cash equivalents, and generated nearly $40 billion in free cash flow (FCF) over the past 12 months.

It’s easily the biggest social media platform in the world, enjoying a market share of 37%, and it made $27 billion in advertising revenue last quarter alone, more than Twitter and Snap‘s full-year 2021 advertising sales combined. Meta’s current situation isn’t ideal, but the social media Goliath is well equipped to weather any economic storm.

It is not the right moment to look for Meta stock deals right now

The metaverse revolution is here

If you couldn’t already tell from its name and stock ticker, Meta plans to be a key player in fostering the development of the metaverse. Still in its early innings, the metaverse can be defined as a digital world powered by virtual reality (VR), augmented reality (AR), artificial intelligence (AI), blockchain, and other computing technologies. Meta’s Reality Lab’s operating segment, which produces VR and AR hardware and software, generated just $695 million in revenues in Q1, equal to 2.5% of total sales.

At the same time, the segment suffered an operating loss of $3 billion, showing that its metaverse business will take time to develop. Investors shouldn’t be too concerned, however, because the company has a strong core business and boatloads of cash available to comfortably invest in the growing segment.

In addition, according to Precendence Research, the global metaverse market size is expected to expand at a compound annual growth rate (CAGR) of 51% through 2030, up to a walloping $1.6 trillion. That represents jaw-dropping growth, and although Meta’s Reality Labs business is currently operating at a loss, the company is well positioned to capture a solid share of the market in the years to follow.

It is not the right moment to look for Meta stock deals right now

Favorable valuation

By virtue of the recent sell-off, Meta is now trading at a low valuation. Today, the stock has a forward price-to-earnings multiple of 14.3, which indicates a significant discount to its five-year mean of 27.9. That seems like an exceptionally low valuation for one of the world’s premier tech companies. On top of its best-in-class core advertising business, the company enjoys a long runway for growth in its young Reality Labs segment.

At existing levels, Meta is a no-brainer buy and grants investors a very strong margin of safety. Even if you’re not a fan of the company’s metaverse transformation, you’re still investing in a highly profitable, cash-generating business that sits at the peak of the massive social media industry. Meta could generate fortunes down the road for those who invest in the stock today.

Meta’s Problems Multiply

But in just the past few weeks, more problems are becoming apparent. Within days of discussing its strategic plan to take on TikTok on the Q2 call, Meta backed away from that plan, at least to an extent, in the face of a backlash from Instagram users who aren’t happy with the new direction.

One of Meta Platforms’ strategies for adapting to Apple’s privacy change is to bring e-commerce transactions within its own family of apps. That way Meta will gain enough knowledge about customers to enable targeted ads. But Amazon is beating Meta to the punch, fueling 18% growth in ad revenue last quarter.

Now Netflix and Disney+ are both shifting to a partially ad-supported business model, shielding only members who opt to pay a premium price from advertising. More ad-supported content, all else equal, would tend to lower the price Meta can charge per ad.

The latest potential worry for Meta is a longer-term one, Needham analyst Laura Martin wrote in an Aug. 8 note. She revealed that Apple, after diminishing the ability of Meta and others to target advertising, is now working on its own ad tech platform that should be hard to match in data quality and pricing power.

 

 

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