The Meta (NASDAQ: META) share price took a huge and unexpected jump after the company released results last week and the stock is now up 54% year to date.
The reason? Better-than-expected advertising revenue and a $40bn share buyback put some big smiles on the faces of its shareholders.
Mark Zuckerberg’s company — formerly known as Facebook — is still down 49% from all-time highs, though. So is February 2023 a great time for me to buy into this stock? I think the answer starts with why that resilient ad revenue was such a big deal.
The light at the end of the tunnel
In 2022, Apple announced the release of its App Tracking Transparency framework. Basically, when an app wants to record data about you, the iPhone pops up with a question asking whether you want to give permission or not.
This is a problem for advertisers who can’t target users as well without that data, resulting in less ad revenue. And it’s particularly a problem for Meta, which drew 98.3% of its total revenue from ads in Q3 2022. The CFO called it a “significant headwind” and projected a $10bn loss in 2022 alone.
So when the advertising revenue turned out better than expected? It showed a light at the end of the tunnel. Maybe these privacy changes won’t affect the bottom line as much as many had feared.
But the most important part of this story is how Meta responded to Apple’s announcement.
Zuckerberg’s big gamble
Meta’s problem, compared to the other big tech companies like Apple, Alphabet or Microsoft, is it doesn’t own the hardware. That means Facebook will always be at the mercy of companies who sell the computers, tablets and smartphones it’s being used on. As it was with Apple’s decision to limit privacy on its devices.
CEO Mark Zuckerberg responded by going all in on Virtual Reality (VR) hardware, the so-called ‘metaverse’, aiming to be first movers in that space. The company has already invested $100bn in the project with seemingly little in the way of progress.
Do I think it might take off one day? The future is hard to predict, but I’m not optimistic in this case. VR hardware has been around in video games for some time, yet VR users still only make up around 2% of players according to data from the Steam platform.
A money printer
The good news is that Meta is nothing short of a money printer. Revenue has grown at double-digit percentage increases for a decade excluding 2022, and even last year was a 4% increase on a constant currency basis.
The company is well diversified between Facebook, Instagram and Whatsapp. Meta estimates that, between all its products, it has around 3bn monthly active users. That’s nearly half the world’s population that uses one of its apps.
And even with the recent 54% increase in share price, a price-to-earnings ratio of around 18 looks cheap compared to other tech stocks like Apple (26) or Alphabet (25).
Am I buying?
In short, I see a solid business with long-term headwinds and uncertainties. As such, I’ll be keeping an eye on Meta but looking elsewhere for my next investments.
