Meta Stock Analysis - is it a value trap?

𝙄𝙨 𝙈𝙚𝙩𝙖 𝙖 𝙏𝙧𝙖𝙥?

Things went from bad to worse for $META (Meta Platforms Inc)

During Q1, 2022, META's stock price fell sharply after the company said that user growth was slowing and making it harder to make money.

The share price slid 26% following news that Apple was becoming increasing able to compete with META's dominance in accessing user data, leading to META cutting advertisement revenue forecasts.

Since then, the plummet has made META lose almost half of its value and wipe out all investors' gains over the past three years.

As a result, a question I hold regarding META's price is not about whether it is cheap enough (there is no doubt it is cheap), but instead is whether or not the stock has become a value trap. In order to answer this we must investigate the fundementals of the company and weigh up the risks associated with an investment.

𝘽𝙪𝙨𝙞𝙣𝙚𝙨𝙨 𝙊𝙪𝙩𝙡𝙤𝙤𝙠

In regards to the future, we know that there will be difficulties, which we will talk about in the section on risks below. But its main business has a lot of long-term support where the foundations are incredibly strong, and the company is investing a lot in new products.

The world is shifting and transitioning towards digital advertising in a way never seen before, and META is still a leader in this space (24.2% market share). Digital advertising is becoming more popular in the world of advertising, and is showing no signs of slowing down. For example, a recent prediction by Emarketer stated that the first time that digital advertising costs more than traditional advertising will be in 2022. Also, the report says that by 2023, more than two-thirds of all money spent on media will be on digital advertising.

META is still a leader, even though it doesn't look like it will grow much. It has a market share of 24.2%, which is about 3.5% less than Google. In 2023, the gap is expected to be only 2.3% (24.1% vs. 26.4%).

Meta have also began to incorporate a wider range of ads across their applications, with post-loop ads being introduced to 'reels' whereby users will have to wait 4-10 seconds after watching a tiktok in order to re-watch the same video. This is another attempt by META to tackle their revenue issues.

At the same time, the company continues to diversify revenue streams, with viritual reality becoming an area where META can thrive due to their first mover advantage. According to a study by Globe Newswire, the size of the VR market is anticipated to grow at a rate of 44.8% (compound annual growth rate ~ CAGR). The size of the market for VR is roughly $4.4billion, but is expected to be worth around $84billion by 2028. This is particularly important in our analysis as META is the leader in this market, despite META's Reality Labs still being in their early stages.

𝙇𝙖𝙨𝙩 𝙩𝙝𝙤𝙪𝙜𝙝𝙩𝙨 𝙖𝙣𝙙 𝙥𝙤𝙨𝙨𝙞𝙗𝙡𝙚 𝙧𝙞𝙨𝙠𝙨

META is a great example of how irrational the market can be and how important it is to always look at the bigger picture when investing. META is not immune to risks both in the short term and in the long term. In the short to medium term, the renormalisation of market demand presents an urgent concern. Unpredictably, the COVID outbreak has multiple effects on the rate of diffusion of e-commerce. However, that rate of acceleration has stopped increasing.

Apple's privacy changes reduces META's dominance in having access to user data, potentially damaging their future advertisement revenue, with it expected to cost META $10billion a year.

It is possible that the corporation has overexpanded in recent years, resulting in capacity redundancy that needs to be processed. It has indicated that it will be cutting back on hiring, and there is also the risk that META may have to lay off employees.

In the longer term, despite the enormous potential of the VR addressable market, META's present Reality Labs only provide a small fraction of the company's total income (less than 2% of it). Even if it is successful in the end, the eventual success will not come without years of continuing expensive investments.

Thank you very much for reading, and have a great rest of your week :)