Avoid Meta Platforms' Stock Until It Makes This Move
Meta Platforms (NASDAQ: META) has reached a position few companies have achieved: It claims more than 3.7 billion monthly users across its platforms, taking it to near global saturation. While that's an admirable accomplishment, it can leave a company without obvious prospects for further growth.
Although it has tried to maintain double-digit growth by going into the metaverse, investors have not warmed to that strategy, and Meta stock has plummeted, dropping 65% from its high. With no clear-cut path to return to rapid growth, it may have to embrace a future as a different kind of company.
Meta's rapid growth days are likely over
During Meta's heyday under the Facebook name, analysts grouped it among the fast-growth "FAANG stocks." Meta earned that honor as it enrolled billions of users in its apps and dominated the social media sphere. Also, becoming a major player in the digital ad space grew its top and bottom lines. At its peak, Meta's P/E ratio reached triple digits, and its market cap briefly topped $1 billion.
No more.
The hard truth is that growth investors seemed to have given up on the stock. As it flopped in 2022, its market cap has fallen to about $360 billion, lower than emerging tech companies such as Tesla and established giants like Johnson & Johnson.
Moreover, while its P/E ratio of 13 has risen in recent weeks, it is the lowest market cap among FAANG stocks. The only other FAANG stock with a P/E ratio under 20 is fellow digital ad giant Alphabet. However, Alphabet's emerging revenue source, Google Cloud, logged 39% yearly revenue growth in the first nine months of 2022 as digital ad revenue stagnated.
Neither Meta nor its metaverse segment, Reality Labs, fared as well. Reality Labs, which made up less than 2% of revenue in the first nine months of 2022, grew its revenue by less than 3% during that period. Also, during that time, Meta increased its research and development spending by 45% in an effort to expand its metaverse offerings, a move that left investors wondering if the metaverse justified such spending.
Indeed, Reality Labs helped reduce the 4% revenue decline for the company over the same time frame. Still, that is not a level that will inspire growth investors.
What Meta should consider doing
With its metaverse not taking off, Meta should probably consider pursuing value-oriented investors. Specifically, it might consider following more closely in the footsteps of a former growth tech stock, Cisco Systems.
Cisco was a high-flying tech stock during the dot-com bubble. Nonetheless, investors soured on the company as its internet hardware products became commoditized. It responded by diversifying into areas such as software and cybersecurity to return to a modest growth level.
While those moves did not make Cisco the fast-growth stock of the 1990s, its P/E ratio of 17 exceeds that of Meta. Additionally, it introduced dividends in 2011 and has increased its annual payout annually since that time. Cisco's yearly dividend of $1.52 per share pays a cash return of about 3.2%, close to double the 1.7% return of the S&P 500.
Fortunately, Meta can likely afford to pay a dividend. Despite its recent challenges, it generated more than $13 billion in free cash flow in the first nine months of 2022. It also claimed nearly $42 billion in liquidity at the end of Q3. With that available cash, investors might respond more positively if Meta spent money on payouts rather than metaverse research.
Moreover, much of Meta's decline stemmed from a downturn in the digital ad market. Hence, it could quickly achieve renewed stock price growth and multiple expansion as the digital ad market recovers.
Making sense of today's Meta Platforms
Meta enjoyed an impressive run as it dominated the social media industry and made itself a formidable competitor to Alphabet in the digital ad market. Today, it struggles to generate growth amid global saturation.
However, rather than investing in a failing strategy, Meta should probably consider pursuing value investors, a group that typically prioritizes stability and cash flows over rapid growth. Embracing an identity as a value stock would align expectations with its current expected performance. Additionally, offering a dividend may be what the social media stock needs to draw investors back into Meta Platforms.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Cisco Systems, Meta Platforms, and Tesla. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
