Meta Platforms Inc.'s (META, Financial) stock price is up over 250% after falling from $378.69 on Sept. 10, 2021 to $90.79 on Nov. 4, 2022. I am one of the investors who did not buy the shares during their depressed levels. Now my analysis and GuruFocus' data show me the value opportunity is gone.
Several factors contributed to the stock decline, which Mark Zuckerberg and Meta executives did well to quell. It must have been a hard time for the company and an even harder time for employees. However, such necessary hardship has undeniably placed the company in a stronger position over the past year and has regained investor confidence.
The great decline
My analysis shows the reaction to Meta's operational difficulties and momentary financial decline around 2021 was exaggerated. For example, diluted earnings per share decreased from $13.77 in 2021 to $8.59 in 2022, but they were $6.43 in 2019 when the stock was trading around $200.
Several vital operational factors influenced the stock price crash. The most widespread of these was the general macroeconomic environment at the time that particularly affected the technology sector.
The Federal Reserve raised interest rates by 25 basis points in March 2022. By the end of the year, the cumulative increase amounted to 400 basis points. This could have impacted high-growth technology stocks like Meta, though I believe that instead, it curbed investor sentiment rather than significantly hindering Meta's operational capacity directly.
The consumer price index rose by 6.2% in October 2021. With the country experiencing the highest inflation rate in 30 years, further concerns of reduced consumer spending and stock market downside likely ignited the mass sell-off in Meta and other tech shares.
In addition, the stock was arguably way overinflated post-pandemic, which the GF Value chart accurately depicts.
The macroeconomic picture and inflated price alone dramatically set the stage for a steep decline in Meta's share price. Enter operational challenges.
One of the most significant operational challenges Meta faced in 2021, outlined by analyst Tristan De Blick, was an investment of over $12 billion in the Metaverse, generating only $2.2 billion in revenue. I can see Zuckerberg's rationale that the Metaverse is a long-term investment the company can capitalize on later. However, this certainly differed from public sentiment then, and even I had doubts.
De Blick also outlined Meta also faced advertising revenue challenges as the economic downturn led to cuts in marketing budgets, negatively impacting ad spending on social media. Additionally, Meta estimated a $10 billion revenue loss in 2022 due to Apple's new privacy settings that prevented tracking.
Interestingly, De Blick's analysis, which I find significantly detailed and compelling, is titled "The 3 Reasons Why Meta Is A Dangerous Value Trap" and was published in February 2022. Unfortunately, as of today, the correct title would have been "The 3 Reasons Why Meta Is A Great Value Opportunity."
Strategy shifts
Despite a momentous challenge on the company's hands, including the most significant drop in stock price it had ever seen, Meta came back with ruthless operational changes to pull itself through.
Employees were undoubtedly the hardest hit by Meta's resolve. Around 10,000 workers were planned to be let go and 5,000 open roles not yet filled were announced to be closed in a March 2023 report from Meta. Since November 2022, approximately 21,000 people have been let go in total. This was all part of Zuckerberg's intention to focus on a "year of efficiency" that included removing multiple layers of management to create a lean organizational structure. Part of me views this as relatively brutal. However, arguably, this is what had to be done to get the company back on track after a challenging macroeconomic and operational period. My only comment would be it may have been better for the company to focus on efficiency earlier, causing less harm to employees by retaining stronger boundaries from the outset.
Some of the other vital elements that Meta focused on in 2023 "year of efficiency" report included notes on investing in tools to maximize efficient outcomes. For example, they referenced "AI tools to help engineers write better code faster" and outlined Buck2, a "new open source build system that compiles builds around 50% faster."
I see Meta taking this efficiency approach more seriously as time goes on. I predict the company will highly weight its investments into artificial intelligence and considerably reduce its workforce exponentially over time as autonomous technology takes over work from coders, for example. I am interested in seeing how these operational shifts coincide with a broader macroeconomic adaptation to AI in the workplace and less necessity on human labor—discussions of a universal basic income come to mind.
Deeper financial considerations
On a more financially-focused note, the company has taken on considerable liabilities since the pandemic. In 2018, it had only $13.21 billion in total liabilities; today, it has $73.40 billion. However, during the same period, the company increased its total assets from $97.33 billion to $216.27 billion.
Considering the company has managed to keep its revenue growth rate relatively stable, I am impressed and not too concerned by the current liabilities level. It reveals that Meta is ruthlessly focused on prioritizing revenue growth from advanced operations. While it has struggled with revenue growth, including a 12.10% one-year growth rate versus a 10-year average annual revenue growth rate of 36%, it has done remarkably well to keep this from sinking further during the recent macroeconomic difficulties and operational hardships.
Even more remarkable is Meta performs well in a discounted cash flow analysis. I would not have assumed so, but running the calculations with GuruFocus' DCF Valuation tool shows a fair value of $356.59 and a current stock price of around $330:
The value opportunity is gone
However, even given a margin of safety of around 7% from a discounted cash flow analysis, it is clear the value opportunity for Meta is long gone. I wish I had bought the shares around or before November 2022. They were incredibly underpriced and shrewd investors recognized this and welcomed Meta's operational shifts that have contributed to their significant share price return of over 250% since then.
Instead, my focus was on stocks like Tesla Inc. (TSLA, Financial) and Amazon.com Inc. (AMZN, Financial), which I believed in and was more confident investing in. I was particularly deterred by Meta's investment into the Metaverse, which I felt looked uncompelling and lacked engagement—part of me still thinks this.
I agree wholeheartedly with the GF Value chart that Meta is now fairly valued. Therefore, I am still not a shareholder and will not be anytime soon. This may have been a once-in-a-lifetime opportunity to buy Meta shares at a deeply undervalued price. All of the evidence suggests to me this opportunity is now gone.
