Meta Platforms Inc (NASDAQ: META) is currently trading near its 52-week low, which, to many, might seem like an opportunity to build a position in a quality name at a deep discount.
To me, however, it continues to look just as risky down here.
Let’s talk the core business first
You can fight all you want, but the “fundamental” story here is no longer as compelling as it used to be.
To begin with, its core ad business is not suitable for a recession that’s coming. Fed Chair Jerome Powell, last week at “Jackson Hole”, was adamant on raising rates further even though inflation is showing signs of a “peak”.
It’s not a place to stop or pause. Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.
The U.S. economy has already had two consecutive quarters of negative GDP. Still, we’re not broadly calling it a “recession” on the strength of the labour market. Considering, however, that the FOMC doesn’t look in the mood to go easy on raising rates until something breaks, I’d say a “proper” recession is no longer a matter of “if” but of “when”.
So, that’s the macro backdrop. Why is it important for Meta Platforms Inc in particular? Because “ad-spend” tends to be one of the first expenditures that are cut in an economic downturn – and the multinational generates almost all of its revenue from advertising.
Last month, Meta reported $28.82 billion in revenue for its second fiscal quarter, down about 1.0% year-on-year.
If it’s already taking a hit to revenue (something it hasn’t, ever before) at a time when we’re just talking about a recession, imagine the disaster it could be when we’re actually in one.
Remember that it’s not speculation. Meta itself said things are expected to get worse moving forward. For the current financial quarter, it forecasts $28.5 billion in revenue at the top end of its range that translates to about a 1.70% annualized decline.
That guidance missed the FactSet consensus by a massive $1.50 billion. The management itself is warning us of tougher times ahead – so I don’t understand why we’re still trying to fight it.
Then comes the arch nemesis – Apple Inc
Further making it worse for the company’s core business is, of course, the privacy changes Apple Inc introduced last year that enabled iPhone users to disable apps from tracking their activity – the bread-and-butter of the ads business.
Consequently, Meta expects a $10 billion hit from App Tracking Transparency (ATT) this year.
But that doesn’t mean Apple is against digital advertising. In fact, it’s reportedly working on bringing more ads to the iPhone – just not the ones based on invasive data collection. Its first-party ad-placement business, as per the tech titan, retains performance that’s identical to the highly targeted ads but not at the expense of the users’ privacy.
If these reports are to be believed, I’d sense a hint here that the iPhone maker wants a piece of the advertising spend.
Now, for it to win in the ad space, Meta has to lose. And if I had to bet on either of the two, I’d rather pick “AAPL” up 25% from its recent low despite a string of macro headwinds versus a “META” that’s been struggling since September 2021.
It’s just a better track record and a more diversified business.
Added competition from the likes of Snap and TikTok in recent years has been a significant challenge for Meta Platforms. You throw Apple in there with its fortress of a balance sheet, and the damage could be unfathomable.
Yes, its daily active users were up 4.0% year-on-year in the latest reported quarter, but I’d rather focus on the average revenue per user that was down 3.0% and came in slightly shy of the Street estimates.
To me, it doesn’t matter how many users Meta adds in a quarter. What’s important is how strongly is it monetizing each one of them; and that isn’t painting a very encouraging picture, at least for now.
Metaverse looks more like a gamble
As you might have guessed by now, I’m not commenting much on the “metaverse” play. Reason being, it’s nothing more than “hearsay” at this point in time.
CEO Mark Zuckerberg sees a multi-billion-dollar opportunity in the metaverse. Perhaps; but in the here and now, all I see is a $2.80 billion loss from Reality Labs in the second quarter.
Look, the issue I take with the metaverse is two-fold.
First of all, you’re essentially betting that Zuckerberg can create a whole another trillion-dollar company from scratch. Remember that for more than a decade, his expansion strategy was almost entirely based on acquisition (WhatsApp, Instagram, Oculus etc.), not creation.
Last of his biggest creation was “Facebook”, and that was about 20 years ago. Tell me I’m wrong for being “iffy”.
Secondly, even if he pulls it off, it’s not a given that Meta Platforms will be the biggest part of the metaverse. There are countless other names competing and investing to secure a pivotal spot in the proposed “new future”.
And frankly, many of them are in a much better shape today than Meta – say an Apple or an Nvidia.
Point being, if you believe in the metaverse, there’s plenty of other, better, more secure ways to play it. A struggling Meta Platforms is not your only bet to get yourself a broader exposure to the metaverse by a long stretch.
In conclusion, as a value investor, I’m not just out hunting for cheap stocks. My job is to find a name that has a disconnect between “price” and “value”. And based on the aforementioned factors, I just don’t see that “disconnect” in Meta Platforms at over 13 times earnings.
I wouldn’t be surprised if it breaks below its 52-week low this time!
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