At the start of last year, Meta Platforms (NASDAQ:META) seemed to be on an unstoppable mission to burn as much cash as possible. As a result, Meta shares fell by 27%.
With 2023 as its year of efficiency, though, the share price has begun a recovery. So is the stock a bargain at today’s prices, or is it too late for investors to buy Meta shares?
What’s changed?
A year ago, Meta was facing a number of headwinds. But quite a few things have gone the company’s way since then.
First, the business has managed to reverse the trend of losing ground to TikTok. And on top of this, its rival faces doubts about its long-term future in the UK and the US.
Second, Apple’s privacy changes had been forecast to cost Meta $10bn in advertising revenue. But the company’s AI investments might have given the business a solution.
Third, the company has been working on its efficiency. This has involved losing around 21,000 employees over two phases and restructuring to get more from its remaining staff.
All of this sounds like positive news, from a shareholder’s perspective, which explains why the stock has more than doubled from its November 2022 lows. But is it a buy?
Valuation
At today’s prices, Meta trades at a price-to-earnings (P/E) ratio of 27. For context, that’s higher than Google’s parent company Alphabet (22), but there are a couple of things to note.
First, Alphabet has its own headwinds to contend with. Most notably, competition from Microsoft has cast doubt on Google’s long-term dominance.
Second, I expect Meta’s earnings to grow significantly. Analyst forecasts are for earnings per share (EPS) to be $10.22 this year, rising to $15.89 by 2026.
At today’s prices, $15.89 in EPS would be a P/E ratio of 13. I don’t expect Meta shares to trade at that level, so if the company achieves those earnings, I think the stock will be higher.
Even after a 70% climb since the start of the year, the stock still looks like reasonable value. But I think there are still reasons for caution.
Metaverse
One of the big issues with Meta shares last year was the amount of money the company was spending on its metaverse projects. And I think that’s still a concern.
There’s an argument to be made that the metaverse segment doesn’t matter because the core platforms are worth the market cap. I think that’s a bad argument.
Reality Labs (which houses the company’s metaverse operations) isn’t something that can be ignored, though. It’s losing significant money.
In 2022, the metaverse projects lost $13.7bn, after losing $10.2bn the previous year. Even with the staff reductions, I don’t see that changing any time soon.
The metaverse looks like an expensive investment. And I’m not sure it will pay off – the metaverse looked a lot more plausible when pandemic lockdowns were in place.
Risks and rewards
I’m aware that not all of Meta’s capital expenditures are focused on the metaverse. But a big part of it is and that means there’s a good amount of uncertainty from my perspective.
At $100 per share, I thought that there was enough potential to justify the risk. At $211, I think the equation is less attractive, so I’m going to keep watching for a better opportunity.
