Is The Meta Platforms Stock Meltdown a Rare Buying Opportunity?

Key Points

• Advertising spend is falling, but user engagements are robust as nearly 3.7 billion people a month use  Meta Platform's  Family of Apps including Facebook, Messenger, Instagram, and WhatsApp  
• CEO Zuckerberg continues to invest heavily in the Metaverse despite weak macroeconomic conditions and slowdown to its top and bottom lines
• Meta is literally going “all in” on the Metaverse and investors are nervous as it’s still a proof-of-concept money pit
• It’s WhatsApp application and paid messaging has yet to be fully monetized, but has more than two billion people using it daily 
• META shares are down (-71%) on the year and trade below 13X forward earnings at share prices not seen since 2016
• Meta continues to have intrinsic value the farther shares sink as the Company has $42 billion in cash and marketable securities

Social media developer Meta Platforms NASDAQ: META stock took a (-24%) cliff dive after its Q3 2022 earnings miss. While the earnings miss has investors concerned, the revenues came in better than expected by nearly $300 million. The strong U.S. dollar make a $1.79 billion impact on revenues and is expected to make a (-7%) impact in the next quarter. Engagements were strong across all its applications. Perhaps the biggest concern driving shares lower is the unfettered determination of CEO Mark Zuckerberg to literally go all in on Metaverse investments. While Mr. Market didn’t mind the money-losing investment when indexes were hitting highs in a raging bull market, it is extremely upset as the rate of spending continues higher in light of weakening macroeconomic headwinds in a bear market. Ad spending has been falling as evidenced by the results for Snap NASDAQ: SNAP and Alphabet NASDAQ: GOOGL, which saw its YouTube ad sales fall (-2%) in the last quarter. Investors expect CEO Mark Zuckerberg would take heed and pump the brakes on its spending, but that’s not even in the equation. In fact, Zuckerberg cautioned that the losses in its Reality Labs segment which is dedicated to the Metaverse would continue to grow “significantly” in 2023. Reality Labs contributed to the 19% jump in Research & Development expenses. However, the strong engagements underscore that Meta is not becoming the Myspace of social media any time soon. Meta shares are providing a bargain opportunity for investors that have been waiting for a pullback.

A Behemoth of Scale

While social media networks like Twitter, Pinterest NASDAQ: PINS and Snap report their metrics in the millions, Meta Platform’s metrics are reported in the billions and engagement remains robust. Their flagship Facebook saw its highest-ever traffic of nearly 2 billion people using its platform daily. Instagram has over two billion monthly active users (MAUs). Its the answer to Tik Tok is Reels. Reels has grown to over 140 billion clips across both Facebook and Instagram, up 50% in six months. Although Reels has crossed the $1 billion annual run rate, the worth rate of monetization is much slower than Feed or Stories resulting in a $500 million headwind next 12 months to 18 months.  Its WhatsApp application hasn’t been monetized yet but sports more than two billion daily users. This is the ace up the sleeve that could spike both top and bottom lines once monetized. Total monthly reach has grown to over than 3.7 across its Family of Apps.

Double-Edged Sword and the Metaverse

CEO Zuckerberg owns 90% of the voting rights for Meta. This is a double-edged sword. His leadership led the Company to grow into the world’s largest social media platform. However, his obsession with the Metaverse has investors concerned as the only one who can hit the brakes on this investment is Mark Zuckerberg. This has also spooked investors into unloading shares as he detailed the pain to come, “We expect Reality Labs expenses will increase meaningfully again in 2023, with the biggest drivers of that being the launch of the next generation of our consumer Quest headset and hiring that has been done in 2022, but for which we are going to be paying the first full year of salaries next year.” He concluded, “There is still a long road ahead to build the next computing platform, but we are clearly doing leading work here. This is a massive undertaking. And it’s often going to take a few versions of each product before they become mainstream, but I think that our work here is going to be of historic importance and create the foundation for an entirely new way that we will interact with each other and blend technology into our lives as well as the foundation for the long-term of our business.”

Here’s What the Weekly Chart Says

The weekly chart attempted a market structure low with a buy trigger set above $137.84 on the week before earnings release, only to have early buyers get rug pulled when it broke below the $123.02 support level. The weekly 20-period exponential moving average (EMA) resistance continues to fall at $153.98 followed by the weekly 50-period MA at $211.26. META proceeded to crack below the $100 whole number level towards $97s where it hasn’t traded at since February 2016. The weekly volume has been the heavy surpassing levels reached during January and February 2022. Long-term support levels underneath lurk at $89.37, $72.00, and $54.66. The technical damage to the stock will take time to heal as the market re-prices its valuation for META stock. META will need to regain the $100 level before convincing buyers to come back into the stock.

Can the Metaverse Ever Become Mainstream?

Who wants to wear a headset for hours at a time? Virtual reality is not accessible to the mainstream at present as it requires a powerful computer and expensive special headgear. Zuckerberg is pushing for it to become a tool for enterprise, but the adoption outside of video gaming has been slow. His goal is to tap into the 200 million people who get a new PC every year to use the Metaverse to get work done in a virtual and mixed reality experience. Meta has teamed up with Microsoft NYSE: MSFT to bring their productivity suites, Adobe NYSE: ADBE and Autodesk NASDAQ: ADSK for creativity tools, Zoom NYSE: ZM for communications and Accenture NYSE: ACN for enterprise solutions.

The Big Plunge

Meta shares collapsed (-24%) following its fiscal Q3 2022 earnings release on Oct. 26, 2022. The Company reported an adjusted earnings-per-share (EPS) profit of $1.64 excluding non-recurring items versus consensus analyst estimates of $1.85, a (-$0.21) miss. Revenues fell (-4.5%) year-over-year (YOY) to $27.71 billion beating analyst estimates for $27.4 billion. Total costs and expenses grew 19.% YoY to $22.05 billion. Daily active users (DAUs) rose 3% YoY to 1.98 billion. Monthly active users (MAUs) rose 2% YoY to $2.96 billion. Meta provided in-line guidance for Q4 2022 revenues $30 billion to $32.5 billion versus $32.23 billion consensus analyst estimates.

A Rough Diamond

The collapse in Meta’s shares has dropped its price/earnings to under 13X. Investors ponder where Meta shares are a value now. The question can only be answered in the rearview mirror. Meta has clearly warned investors of more pain in the near term to gain in the long term and the market is repricing its shares as result. Its platforms are sticky and have become a part of the daily routine for billions of user worldwide. Meta is still very profitable and if the Metaverse and VR become mainstream, the bet could pay off big. Even Zuckerberg can’t clearly articulate just how big, but big.