FB with Nobias technology: Meta Platforms Just Fell 26%. Is This A Buying Opportunity?
Meta Platforms (FB) just broke a record…and not the kind of record that you want to see as a shareholder. After reporting negative subscriber growth for the first time during its fourth quarter earnings report on February 2, 2022 and offering disappointing guidance when it comes to future growth, FB shares posted the worst single session performance of all time, related to the amount of market capitalization that it lost.
Meta shares plunged more than 26% on Thursday, erasing more than $220 billion of market value. And yet, while these losses are impressive, the fact of the matter is, Meta remains highly profitable (the company produced more than $39 billion in net income during 2021, which was up 35% on a year-over-year basis). The market is fearful of slowing growth, but FB just posted $117.9 billion in full-year revenue, which was up 37% compared to 2020’s result. The company generated $12.5 billion of free cash flow during Q4 alone, pushing its full-year 2021 free cash flow figure up to $38.4 billion. And, at the end of its fiscal 2021, Meta Platforms has $48 billion of cash/cash equivalents on its balance sheet.
After its massive sell-off, at $237.76/share, FB is now trading for less than 17x forward earnings estimates (right now, the consensus Wall Street estimate for FB’s 2022 earnings-per-share is $14.17). In short, this company is trading at a significant discount to its own historical average (FB’s 5-year average price-to-earnings multiple is 26.8x) and the broader market’s forward P/E ratio as well (the S&P 500 is trading for approximately 19x forward earnings estimates after its recent dip).
FB Feb 2022
Has this growth stock transformed into a value stock? Should investors consider buying this dip? We start by looking at what the credible authors and analysts that the Nobias algorithm tracks have had to say. Nicholas Rossolillo, a Nobias 5-star rated author published an article in mid-January which highlighted one of the major catalysts driving the negative momentum in high growth stocks like Meta Platforms: rising interest rates. He explained, “Higher interest rates lower the future value of cash flows, which in turn lowers the present value of a stock. Since high-growth companies are expecting the biggest increases in future profitability, they can be extremely sensitive to changes in interest rates. With the Fed indicating it might hike rates four times this year, 10-year Treasury yields have gone from as low as 1.4% last month to nearly 1.8% today.”
At a high level, the sentiment regarding rising rates and its impact of equity valuations has caused investors to rotate out of growth stocks and into more defensive, value oriented names. This has done a lot of damage to the share prices of stocks like FB. However, Rossolillio believes short-term share price weakness here represents an attractive opportunity for long-term investors. He said, “Bouts of extreme volatility are gut-wrenching, but if you bought any of these three stocks or another high-growth name, stay focused on their long-term potential. Assuming business momentum continues, sharp sell-offs like this most recent one are totally normal for all growing companies.”
Moving from the macro to the micro, Richard Saintvilus, a Nobias 5-star rated author, recently posted an article highlighting the consensus expectations that Wall Street had for Meta’s Q4 results. He said, “For the three months that ended December, the Menlo Park, Calif.-based company is expected to earn $3.84 per share on revenue of $33.38 billion. This compares to the year-ago quarter when earnings came to $3.88 per share on revenue of $28.07 billion. For the full year, earnings are projected to rise 38% year over year to $13.92 per share, while full-year revenue of $117.66 billion would rise 36.9% year over year.”
FB beat Wall Street’s estimates on the top-line, posting Q4 revenue of $33.67 billion (up 20% y/y), but the company missed the consensus estimate for EPS, posting Q4 GAAP EPS of $3.67. But, as I said, the sell-off here wasn’t really about the Q4 sales or earnings, but instead, the fact that FB lost roughly 500,000 global users during the 4th quarter, which is not something that investors are used to seeing. Furthermore, the company guided for Q1 revenue of $27-$29 billion, which was well below the $30.27 billion consensus.
This guidance equates to year-over-year growth estimates of 3-11%; the threat of single digit sales growth here has certainly changed the sentiment surrounding this stock. Yet, reading through recent reports on Meta Platforms, it appears that all is not lost for this company. Yes, it looks like social media related growth may be slowing, but as several Nobias 5-star rated authors have recently pointed out, the metaverse remains a tremendous growth opportunity for this company.
Manali Bhade, a Nobias 5-star rated author, posted a bullish piece on Meta Platforms on January 7th, highlighting her belief that the company’s transition into the metaverse could be a significant growth catalyst moving forward. In her piece, Bhade touched upon FB’s solid 2021 performance, noting that FB continues to post strong fundamental growth and maintains one of the strongest balance sheets in all of Silicon Valley. However, looing ahead to 2022 and beyond, she’s even more bullish.
Bhade wrote, “Things, however, may improve significantly in 2022, especially now that Meta is focused on rebranding itself as a frontrunner in the $30 trillion metaverse market (estimated market value at end of the next decade according to Matthew Ball, Epyllion's CEO).
In the past few years, the company has been strengthening its portfolio for this opportunity with a spree of acquisitions such as leading immersive virtual reality hardware player Oculus VR, game studio BigBox VR, and maker of free-to-play game creation and sharing tool Unit 2 games. Coupled with Meta's prowess in social networking, a huge and engaged customer base, and increasing capital expenditure investments (in data centers, servers, network infrastructure, artificial intelligence, and machine learning capabilities), the company is well poised to be a winning play in 2022.” Bhade concluded her Meta Platforms analysis saying, “Against the backdrop of a robust advertising business, healthy financials, and a reasonable valuation, Meta seems to be an attractive pick for 2022.” It appears that investors who are bullish on augmented reality, virtual reality, and ultimately, the metaverse, are going to have to be patient.
During Q4, Meta Platform’s Reality Labs segment, which is responsible for these industries, posted net losses of $3.3 billion. This Q4 result pushed Reality Lab’s full-year net loss up to approximately $10.2 billion. However, it’s worth noting that many analysts, including those bullish on FB shares, have already built in these high expenses into their valuation models.
For instance, in late December Rossolillo called Meta one of his “3 Top Large-Cap Growth Stocks to Buy for 2022” and noted the company’s ability to use present cash flows and its strong balance sheet position to fund its aspirations in the metaverse.
Rossolillo said, “It will take time for the ramped-up spending to pay off, but even so, Meta will be highly profitable next year. Trailing-12-month free cash flow was $35.8 billion, good for a free cash flow profit margin of 32%, with an additional $58 billion in cash and short-term investments on balance as of the end of September. Suffice to say Meta can continue to invest aggressively for the foreseeable future to promote steady double-digit percentage growth. In spite of myriad bad press, the social media giant will be more than just fine as it starts work on the next iteration of online experiences.”
Harsh Chauhan, another Nobias 5-star rated author, also recently highlighted Meta Platform’s metaverse aspirations and his belief that the company is in the pole position in the race when it comes to this revolutionary technology. He said, “Meta plans to increase its investment in this area in the long run, so it won't be surprising to see it dominate a market where it already has a head start.” Chauhan continued, “For instance, Meta leads the VR headset market by a huge margin. Counterpoint Research estimates that Meta's Oculus VR headset controlled 75% of the market in the first quarter of 2021, recording a massive increase from its market share of 34% in the prior-year period.”
Putting a spotlight on the potential size of the augmented/virtual reality market in the relative near-term, Chauhan wrote, “Counterpoint Research estimates that AR/VR headset shipments could jump to 105 million units in 2025 from an estimated 11 million units last year.” Chauhan says that Meta is working on its next generation virtual reality headset, which is “projected to hit the market in 2023.” He also notes that Meta recently entered into a partnership with Ray-Ban parent EssilorLuxottica to develop smart glasses.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
The smart glasses space is a potentially large market for FB to enter; Chauhan wrote, “This could unlock another opportunity for Meta as Mordor Intelligence expects the smart-glass market to generate almost $8 billion in revenue by 2026 compared to $3.9 billion in 2020.”
Without a doubt, this company has a lot going on. FB is trying to better monetize video content on its social media platforms, it’s trying to maintain its global user base and it’s trying to develop revolutionary technology which could usher the world into the next internet age. And, with this in mind, even after its recent pullback, it appears that the vast majority of authors and analysts that we track remain bullish on the stock. 85% of opinions expressed by credible authors recently have been bullish. And, looking at the 4 and 5-star Wall Street analysts that we track, the average price target being applied to FB shares is $398.33.
After the poor guidance and the drop in share price, we wouldn’t be surprised to see analysts coming out of the woodworks with downgrades in the coming days and weeks. However, the current average price target represents upside potential of approximately 67.5%, so even if there are widespread downgrades, it appears as if FB has a very wide margin of safety attached, trading with a sub-market multiple.
Disclosure: Nicholas Ward is long FB. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.