Meta Platforms: You Have To Trust Zuckerberg, Or Else It's Better To Leave
Summary
- Meta's Q2 earnings disappointed the Street and the market. Yet, META held its June lows, indicating that buying support remains robust at the current levels.
- Meta is navigating several multi-year projects that would define the longevity of its competitive advantages. However, the ad industry downturn and macro weakness have worsened sentiments.
- Meta investors need to ask themselves whether they believe Mark Zuckerberg & team can continue to execute well against TikTok and Apple.
- If not, they should consider exiting now and rotating, given the tech bear market. If they do, they should consider adding at the current levels.
- We reiterate our Buy rating. We believe the worst should be over for META, given its valuation.
- I do much more than just articles at Ultimate Growth Investing: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
Leon Neal
Thesis
Meta Platforms' (NASDAQ:META) recent Q2 card was digested by the market as the headwinds from worsening macros, reels' monetization, and Apple's (AAPL) IDFA changes continue to affect its near-term operating results.
So, we believe investors' critical question is whether it can get any worse from here?
There's little doubt that Meta's current transition to short-format video represents an enormous challenge it has probably not faced previously. Coupled with its signaling challenges, it has exacerbated the company's ability to compete effectively on several fronts while dealing with a broader ad industry downturn.
Notwithstanding, despite what we believe are terrible results in Q2, META held its June lows resiliently. However, its long-term bottoming process weakened in July, given the recent headwinds. So, there's an increasing possibility that META could re-test its COVID lows before staging a sustained bottom. Despite that, we remain confident that its June lows should hold until proven otherwise decisively.
Meta's multi-year transition roadmap has likely forced investors without at least a medium-term outlook to have given up their shares. As a result, we believe it will likely stay in the doldrums for some time.
But, our valuation analysis suggests that META stock is closer to the bottom than the top if you believe in Mark Zuckerberg & team's execution prowess. Therefore, a re-rating in its risk profile could lift its valuation markedly, lending to further buying upside.
As long-time Meta investors, we maintain our core holding in META and trust that the "perfect storm" engulfing it is closer to the end than the beginning. Therefore, we will continue to be buyers of META at the current levels and will continue to layer in accordingly.
As such, we reiterate our Buy rating on META.
Meta Remains Confident To Emerging Stronger
The question that investors need to ask themselves is whether they still believe in Zuckerberg & co. It's critical because Meta's lifeblood is in digital advertising. It doesn't have a diversified business like Amazon (AMZN). It isn't a gatekeeper like Apple (AAPL) and Google (GOOGL) (GOOG). It also doesn't have the SaaS advantages and lock-in like Microsoft (MSFT).
META Vs. QQQ 5Y performance % (koyfin)
Aside from Netflix (NFLX), which arguably has the weakest moat among its FANMAG peers, Meta looks vulnerable. Is the market wrong in sending META into negative territory in its 5Y performance compared to the Invesco QQQ ETF's (QQQ) 119.3% return over the same period?
We urge investors not to argue with the market. We believe it's justified for the market to de-rate META.
Instead, Wall Street got it wrong. We got it wrong. The company doesn't quite have the same sustainable advantages as its FANMAG peers (excluding Netflix). TikTok's (BDNCE) ascendance has merely highlighted the inherent flaws in its competitive moat.
Therefore, the market needs to reset META's valuation to justify the existential threats posed by TikTok. Consequently, it gives more breathing space for management to execute its multi-year roadmap to monetize Reels and prove that it can build a sustainable advantage moving forward. CEO Mark Zuckerberg accentuated (edited):
And in terms of building sustainable competitive advantages, in terms of the social graph, right, people have been able to get that from phones for more than a decade now, right? So I don't really think that's been the thing for us. I think we're a serious technology company. We invest a lot in building infrastructure. And culturally, we focus on moving and learning faster than everyone else. And I think that those are sustainable advantages. And so certainly, I think that the AI technology infrastructure that we're building, I think it can compound and be better than others in the industry and that will be an advantage and make the product better over time. What that really comes down to is I try to push the company to be one that learns faster and just keeps iterating and moving faster than we did in the past and than others in the industry do. And I think if we can do that well, then we'll continue to succeed. (Meta FQ2'22 earnings call)
Mark Zuckerberg also highlighted Meta's "very deep, philosophical competition" in a recent internal meeting. The Verge reported that Zuckerberg told staff that Apple would be a keen competitor in its metaverse project. It's also one that could define the innings of how the metaverse ecosystem could look. Meta is attempting to build a "more open ecosystem" compared to Apple's more guarded approach. Zuckerberg highlighted (edited):
I think it's pretty clear that Apple is going to be a competitor for us, not just as a product but philosophically. We're approaching this in an open way and trying to build a more open ecosystem. We created the Metaverse Open Standards Group, and Apple didn't join. - MacRumors
Hence, we believe that investors still on board with Zuckerberg must see through its multi-year projects (metaverse, Reels, etc.) that are in the early stages of their transformation. Otherwise, it's better to exit now and rotate to other stocks.
Is The Valuation Reset Complete?
Meta revenue change % comps consensus estimates (S&P Cap IQ)
Investors should note that the Street (bullish) downgraded Meta's estimates (as seen above) markedly through FY23, given the series of headwinds, including a worsening macroeconomic backdrop.
Therefore, it should also explain the weakness seen in META post-earnings as the market adjusted its valuation models.
Meta adjusted EPS change % and FCF change % consensus estimates (S&P Cap IQ)
Notwithstanding, the consensus estimates suggest that these headwinds are transitory and not expected to be structural. Therefore, Meta's bottom-line growth could climb out of its nadir from FY23, as it also laps Apple's IDFA changes from Q3 onwards.
Hence, Meta is making its "historic" transformation from a position of strength and not weakness. Meta is still sitting on a net cash position of $23.81B and is expected to remain highly free cash flow (FCF) profitable. If there's one company with the incredible resources and execution prowess to navigate these headwinds, it has got to be Meta. Outgoing COO Sheryl Sandberg emphasized (edited):
There's no doubt that we're going through a transition period and doing so at a time of global economic uncertainty. But despite the current challenges, I'm very confident for the long term. We're facing a cyclical downturn but over the long run, the digital ad market will continue to grow. Advertisers will go where they get the highest return on investment and ability to drive their business. We believe we will continue to show up very favorably compared to other advertising options. (Meta earnings)
Is Meta Stock A Buy, Sell, Or Hold?
We reiterate our Buy rating on META.
Note that META last traded at an FY25 FCF yield of 9.28%. Therefore, we believe a significant level of pessimism has been priced in. Nevertheless, despite near-term volatility, META seems closer to the bottom than before, given easier comps moving ahead.
However, it depends on whether investors still believe in Meta's multi-year transformation journey. Given the battering in many growth and tech stocks, if they want to exit to rotate, they might as well do it now.
Do you want to buy only at the right entry points for your growth stocks?
We help you to pick lower-risk entry points, ensuring you are able to capitalize on them with a higher probability of success and profit on their next wave up. Your membership also includes:
24/7 access to our model portfolios
Daily Tactical Market Analysis to sharpen your market awareness and avoid the emotional rollercoaster
Access to all our top stocks and earnings ideas
Access to all our charts with specific entry points
Real-time chatroom support
Real-time buy/sell/hedge alerts
Sign up now for a Risk-Free 14-Day free trial!
This article was written by
JR Research is a seasoned investor with a background in economics. He focuses on identifying growth companies, market trends and growth opportunities. His approach combines price action with fundamentals.
He runs the investing group Ultimate Growth Investing, which specializes in identifying high-potential opportunities across various sectors. The group is designed for aggressive investors seeking to capitalize on high-growth opportunities, and investors looking for growth opportunities at a reasonable price. Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of META, AMZN, GOOGL, MSFT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (24)
