For the past few months, Meta Platforms Inc. ’s market-beating rally is failing to convince some sceptics, given how much money the owner of Facebook and Instagram continues to pour into building its version of the metaverse.
Meta is the most brilliant performer in the S&P 500 Index since the stock’s recent low in November, gaining 54 per cent. The bounce was partially driven by the social-media firm’s announcement that it would slash more than 11,000 jobs, the first major round of layoffs in the company’s history.
Yet signs of scepticism abound: Even after the rise, Meta sells for less than half its average price-earnings multiple of the past decade and is one of the cheapest stocks in the Nasdaq 100 Index. Its shares are still 64 per cent below their 2021 record and analysts on average expect the stock to gain a mere 7.7 per cent over the next one year.
From the bears’ perspective, the problem is that Meta’s expensive bet on the metaverse — an immersive virtual world — isn’t going away any time soon and will account this year for a fifth of all costs. And its once-lucrative ad business is stagnating because of changes in Apple Inc.’s privacy policy that makes it more difficult to target consumers with ads on its devices.
The metaverse will keep the company’s expenses “relatively high,” said Louise Dudley, global equities portfolio manager at Federated Hermes. “There’s a lot of execution risk at Meta, making it less of a bull case compared to the other mega-caps.”
For the rally to go further, Meta may also need to offer investors more clarity on some things, comprising its strategy to handle competition from social media rivals such as Tiktok.
Perhaps more crucially, investors will want to see how much of a squeeze Apple’s privacy policy change is continuing to put on ad revenue. In February, Meta estimated Apple’s move would cause a $10 billion revenue hit for the year.
On the other hand, some Meta bulls hold out hope that Chief Executive Officer Mark Zuckerberg will pare further or give up entirely on his ambitions and spending for the metaverse. His hand may be forced by the looming economic slowdown, which is curbing sales at tech companies.
Terry Smith, manager of the $28 billion Fundsmith Equity Fund, wrote in a letter to investors this month, specifically citing Meta’s spending, “This pressure on revenue growth may cause some of the tech companies we invest in to stop behaving as though money is free and halt some of the less promising projects outside their core business. Without that spend, we would own leading communications and digital advertising business on a single-figure price-earnings ratio.”
