Meta Platforms (FB, Financial), the company formerly known as Facebook, has experienced a lot of headwinds that have led to its share price declining 38% from all-time highs. The downward trend began in September of 2021, but prices began to really plunge on Feb. 2 of this year after the earnings report where it disclosed its first-ever loss of daily active users (DAUs).
In this article, I'm going to dive into the reasons why the stock is down in order to evaluate whether the dramatic share price decline presents a value opportunity or a value trap.
Slowing user growth
Early in February, Meta announced their fourth-quarter and full-year earnings results for 2021. For the first time in the social media company's history, user growth has started to slow, with DAUs down 0.05% quarter-over-quarter.
With 1.92 billion DAUs, the company still has a very strong customer base. However, the trend of slowing growth is clear. I have plotted out the company's DAU growth over the past few years in the below chart We can see the annual growth was lower than the lockdown highs of 2020, in which the company saw a boost of 10.9% user growth. But even more worryingly, the growth rate was also slower than the pre-pandemic growth rate of 8.56%.
The cookie crumbles
Despite Facebook changing its name to Meta to signify its foray into the Metaverse, the company’s social networks are still their core products. These are monetized via ads; the business makes over 97% of revenues from advertising. The company is in a strong advertising position and is in a duopoly along with Alphabet's (GOOG, Financial)(GOOGL, Financial).
Alphabet has recently announced that it will be banning “cookies,” the web trackers from its chrome browser, by 2023. This would impact Facebook directly, as the company uses a cookie called the “Facebook Pixel” to help track users for advertising. Although Meta is working on a workaround with their Facebook SDK, it is still a blow to the company.
Apple has already released iOS 14 updates for its Safari browser which require the user's permission to track their data on apps and websites.
In Meta’s own words, “Ads personalization and performance reporting may be limited for both app and web conversion events.”
Thus, these changes and others to follow are certain to impact the company, by its own admission.
Competition is heating up
Competition is heating up in the social media and advertising markets, with more companies starting to take an “omnichannel” approach to marketing, running ads on hot new platforms such as TikTok. TikTok now has over 1 billion monthly active users (MAUs) - this is fast approaching Instagram’s 1.4 billion MAU’s. Below is a breakdown of MAUs for various social media platforms:
- Facebook - 2.9 billion MAUs
- YouTube - 2.2 billion MAUs
- Instagram – 1.4 billion MAUs
- TikTok – 1.0 billion MAUs
- Snapchat (SNAP, Financial) – 500 million MAUs
- Pinterest (PINS, Financial) – 480 million MAUs
- Twitter (TWTR, Financial) – 397 million MAUs
Even on Meta’s own platforms, they have noticed a shift in engagement more towards Reels, which monetize at lower rates than Feed and Stories. Will this trend continue? If so, the company will need to adapt its advertising capabilities to fit consumer tastes.
Meta is undervalued
With the headwinds outlined prior, it is no wonder that Meta stock is down. Plugging the financials into my advanced discounted cash flow model, I have predicted conservative revenue growth of 11% for next year and then 15% for the next two to five years.
I have also predicted margins to decrease (due to increased investment) from 46% to 44%. Using these assumptions, Meta is 20% undervalued with a fair value estimate of $408 per share.
The GF Value line also shows the stock to be significantly undervalued at the time of writing. The GF Value is a unique GuruFocus intrinsic value estimate based on historical price multiples, historical returns and analysts' estimates of future business performance.
Value stock or value trap?
From my analysis, I think it is more likely that Meta is a value stock and not a value trap. Although the company does have lots of headwinds that probably make at least some of the price drop well-deserved, there are some positives.
For one, the founder and CEO Mark Zuckerberg is a strategic genius. Zuckerberg has executed a very similar strategy to Microsoft (MSFT, Financial) in the late 90's, which I call the "fast follow." Every time a new competitor product starts to gain traction, Meta either acquires or copies fast. For example, it acquired Instagram, copied Snapchat with Instagram Stories, adoped TikTok with Instagram Reels and added IGTV/Facebook Watch based on YouTube.
For me, a bet on the future of Meta is a bet on the execution skills of Zuckerberg and his ability to continually pivot the company to the next big thing, as he has done previously.
Zuckerberg's latest pivot was signaled by Facebook changing its name to Meta, signifying the company's push into the Metaverse, a 3D virtual reality world combining multiple technologies such as Augmented Reality (AR) and Virtual Reality (VR) for work and play. This is a big bet for the company, which has invested approximately $10 billion into the Metaverse. Although the true Metaverse is a long way off, and Meta is starting out a long way behind the first-movers of the industry, there is a chance this could pay of huge for the company.
Final thoughts
Overall, Meta is an incredible company which is still generating huge amounts of profits. They have great margins and an exceptional founder. However, it is clear the company’s story has changed, and there are signs its dominance in the social media market is fading.
Whether the company is a value stock or value trap is really impossible to tell for sure at this point. Personally, I have faith in Zuckerberg and the Metaverse, so if forced to choose, I'd say it's more of a value stock than a value trap. However, I believe it's more accurate to consider Meta a speculative growth stock at this point.
