Amid the recent tech selloff, shares of Meta Platforms (META), parent of Facebook, have been punished, falling 47% and 53% in the respective six months and nine months, including 11% drop in the past thirty days. But is now the best time to buy the stock? META appears significantly undervalued when compared to its large-cap peers.
META Future Revenue Projections
Slowing user and advertising growth at its core Facebook and Instagram platforms have spooked the market into questioning Meta’s future. The bulk of the company’s revenues come from the selling of advertising placements. However, growth concerns have been largely caused by iOS changes made by Apple (AAPL), which has made it harder for apps to track the habits of its users, information that had been used to target ads to certain user behavior.
In reporting its two main operating divisions, the Facebook Family of Apps, which comprises of the advertising business, makes up some 97% of consolidated revenue, while the Reality Labs division makes up roughly 2%. However, the latter is currently operating at a loss. CEO Mark Zuckerberg is betting heavily on the Metaverse which, according to some estimates, is expected to grow as much as $2 trillion annually. The company’s advances in virtual reality with its Oculus VR headset (Meta Quest) gives it a leg up on the competition.
Zuckerberg believes that the company’s significant investments in virtual reality (VR) and augmented reality (AR) — a market that comprises hardware, device-controlling software, and content, can offset near-term weakness in the advertising business. Meanwhile, AI technology is another area where Meta continues to grow with its Reality Labs division, spending more than $10 billion annually. It is believed that Meta’s headcount in the Reality Labs division now accounts for 20% of the company’s total employees.
VR Projections Improve META Stock's Future
Based on the stock's action over the past year, the market isn't buying that Reality Labs can deliver the sort of profits the company is betting on. But I believe investors are too bearish and underestimating the growth potential of the company. The market for VR and AR are projected to grow to $22 billion, according to some estimates. By the end of 2030, the market size is seen growing 35% annually (compounded) to reach near $80 billion. Zuckerberg believes that the next generation in computing platforms will be dominated by VR, and he clearly wants to own that market.
The company’s $2 billion deal for Oculus eight years ago signals the beginning of this shift, and certainly gives it an advantage over competitors such as Apple and Microsoft (MSFT). Some estimates suggest Meta can grow revenue in its Reality Labs segment by 25% to 28% per year for the next ten years. Likewise, while the operating margin for Reality Labs division is currently negative, assuming the revenue growth picks up in the next two years, that division will become profitable quickly.
To achieve this, the company is spending $20 billion this year, and plans to increase that spending to $25 billion in fiscal 2023. Until then, Meta’s Family of Apps will have to carry revenue and profits. The company will report Q2 earnings in July, and the Street is expecting adjusted EPS of $2.64 on revenue of $29.29 billion. Assuming a top and bottom line beat, along with strong user growth metrics, META, which is currently trading at just 15 times expected earnings, looks like a strong bargain.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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