Meta Platforms (META, Financial) has been one of the top battleground stocks among investors for the past couple of years following its name and strategy change in late 2021. Consequently, from the day of its name change on Oct. 21, 2021 to lows reached near the end of October 2022, Meta's stock shed over 60% of its value.
The bulls would be quick to blame the stock market rout last year to explain the dismal performance, but a lot of it is Meta's own doing. Meta has faced multiple structural and secular headwinds over the past few years as it looks to return to its glory days by focusing on the Metaverse, now that its prospects for high growth rates in the social media space are dismal due to the company's juggernaut size.
However, the past few months have been remarkable for the stock, with shares gaining over 50% in the past three months. Despite the strategic shift, the numbers show that Meta is still relying on its traditional social media channels for its income, and based on this, some are saying the stock had become undervalued. The smart money seems to agree, as the Premium gurus followed by GuruFocus have mostly been buying the stock for the past year. The number of guru trades for the stock during the fourth quarter of 2022 included 30 buys and just 17 sells. Its robust fourth quarter showing helped reverse the negative trend from the previous quarter.
Take it from the pros
Some of the top gurus adding to their Meta holdings in the last quarter included Richard Pzena (Trades, Portfolio), David Abrams (Trades, Portfolio) and Chris Davis (Trades, Portfolio), who increase their holdings by 85.5%, 80.6% and 53.7% respectively.
In its investor letter, Baron Funds discussed Meta and talked about how it believes investors ignore Meta's long-term prospects due to a hyper-focus on the near term. It did note that foreign currency movements, a weakening macro environment and growing costs have created a double-whammy impact on free cash flows and margins.
Nevertheless, the firm's letter there are plenty of positives from Meta's recent business developments, which could have its "next-12-months earnings yield climbing above 9% during the quarter. This yield also compares to about 6% for the S&P 500 Index."
Baron's investing philosophy revolves around businesses with the potential to raise profits significantly quicker than their sectors, a strategy which has paid dividends (metaphorically speaking) for the firm and its investors over time. In fact, Baron Funds' five-year cumulative returns represent an excess gain of over 122.9% compared to the S&P 500.
The 'year of efficiency'
Meta recently released another dismal quarterly report that comfortably missed analyst estimates for the third consecutive time, and yet its stock was up 23% the next day. Why did the stock rise 23% despite a lackluster report? It could be related to what the company calls its "year of efficiency" strategy.
CEO Mark Zuckerberg stated during the earnings call that the "management theme for 2023 is the 'year of efficiency,' and we're focused on becoming stronger and more nimble." The announcement was hailed by investors who had called for the company to rightsize its massive Metaverse spending over the past several years.
Meta's troubles have been exacerbated by the mounting losses from its Metaverse segment Realty Labs, which burned a colossal $13.7 billion last year. However, as the CEO's recent announcement suggests, we'll probably see less of the Metaverse, though there could perhaps be more spending on generative artificial intelligence (AI).
Last month, the company introduced a robust new language model called LLaMA (Large Language Model Meta AI). It's a novel AAI system that involves mining massive amounts of data to generate content. The viral success of ChatGPT points to sustainable growth opportunities in the AI space for tech companies worldwide.
Furthermore, Meta's short-form video platform Reels has been a monster success and continues to be a major growth catalyst for the social media segment. Reel plays across Meta's top platforms Facebook and Instagram have increased by more than 50% from last year. According to Baron's investor letter, Reels is quickly scaling its monetization, improving its revenue run-rate by $2 billion during the third quarter to $3 billion.
Takeaway
Meta Platforms has undeniably had a rough time over the past couple of years. However, recent developments have shown that management is finally doing what's necessary to help get costs down. Additionally, focusing research and investment dollars on generative AI rather than the Metaverse seems like a prudent move.
One big thing that makes me bullish on Meta is the high guru buying of the stock over the past year. It's easy to get caught up in the near-term headwinds, but in the long-term, a business shift and high research spend are necessary when growth rates have reached a plateau. As it looks to scale its operations in the upcoming quarters, I wouldn't be surprised if retail investors begin to return to Meta as well.
