Tumbling yet again after a poorly-received earnings report, value investors are again arguing that Meta Platforms (NASDAQ:META) is severely undervalued, and a screaming buy at current prices. Sure, on the surface, META stock appears dirt cheap.
After falling nearly 72.5% over the past year, shares in the tech giant, parent company of popular social media platforms like Facebook, Instagram and WhatsApp, trade for only 9.2 times earnings. That’s an extremely low valuation for a tech stock, and a multiple far lower than that of the S&P 500, which has a price-to-earnings (or P/E) ratio of 19.8.
But before you follow the value crowd’s lead and snap up META hand-over-fist, keep in mind that there’s a good reason why Wall Street has devalued the stock to such a severe degree.
Barring a major change, it’s best to stay on the sidelines.
| META | Meta Platforms | $95.80 |
Why META Stock Trades so Low
Meta Platforms is not the only big tech stock to sustain high losses over the past twelve months. Macro factors have knocked mega-cap tech stocks substantially lower since November 2021.
However, compared to peers, META stock has experienced the most severe drop in price. Like similar names, shares have been affected by spiking interest rates. Higher interest rates have resulted in material multiple compression among mega-cap tech stocks. The stock has also been affected by growing recession fears.
The recent economic slowdown has already had an impact on Meta’s advertising-dependent revenue model. Last quarter, revenue fell 4% year-over-year. The softening of digital ad demand could get even worse if there’s a recession in 2023. However, alongside these challenges, there’s another massive uncertainty with this stock in play.
That would be CEO Mark Zuckerberg’s willingness to “bet the ranch” on the metaverse. Besides changing the corporate name from Facebook Inc. to Meta Platforms, Zuckerberg continues to ramp up the company’s metaverse-related growth expenditures.
This has played a big role in Meta’s nearly 50% earnings decline last quarter. An additional increase in metaverse spending stands to remain a drag on both operating and stock price performance.
What Could (Potentially) Change the Story
With more of the details in mind, you can’t deny META stock is cheap for a reason. Assuming the company’s metaverse spending trends continue, to say this stock is trading for only a single-digit earnings multiple is a misleading statement.
Over the next few quarters, the economic downturn may continue to affect Meta’s top-line. Coupled with rising operating costs from the metaverse wager, there’s a good chance earnings per share (or EPS) will drop in 2023. At least, that’s the view of sell-side analysts.
The average forecast for Meta’s 2023 EPS is currently $7.72. The lowest estimate calls for EPS of $4.96, which perhaps suggests META stock trades for fair value at present.
Having said all of this, there’s one thing that could happen, which would remove much of Meta Platforms’ high uncertainty, and make it a more worthy investment opportunity: Zuckerberg changing his tune regarding the metaverse wager.
Of course, the Meta CEO holds majority voting control of Meta. Zuckerberg isn’t at risk of being forced out by, say, an activist investor. It’s speculative to assume that he will cave into shareholder demands to implement cost and capital spending reductions greater than those currently planned.
The Verdict on META Stock
As I’ve argued previously, if you’re bullish on the metaverse trend, there may be merit in entering a small, speculative position in Meta Platforms. If you are considering it as a value play, however, you may want to think otherwise.
Don’t let META’s current low P/E multiple fool you. Earnings are extremely likely to drop in the coming year. Shares aren’t as cheap as they seem at first glance. In fact, they could get cheaper.
It all depends on how the above-mentioned factors (economic changes, the company’s metaverse spending), as well as other factors like competition from rival platforms like TikTok, play out from here.
Unless Zuckerberg begins scaling back the company’s metaverse plans, shares will likely continue to flounder. Instead of falling for this likely value trap, skip out on META stock instead.
META stock earns an “F” rating in Portfolio Grader.
On the date of publication, Louis Navellier had a long position in META. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.