‘ stock is as cheap now as it has ever been since the company’s 2012 initial public offering.
After a 32% fall in its shares, to $219, since Feb. 2, when its fourth-quarter earnings surprised investors,
(ticker: FB) now trades for 17 times projected 2022 earnings of $12.59 a share.
The only other time that Meta was close to being this inexpensive during its decade as a public company was in late 2018. Then it was a buying opportunity, as Barron’s said at the time. In the next 12 months, the stock rose more than 50%. Its average price-to-earnings ratio has been about 30 in the past five years, according to FactSet.
Shares of Meta, formerly Facebook, were down 0.3% on Monday.
In Meta’s fourth-quarter results and first-quarter outlook, there were worrisome signs that use of its apps was slowing and that its advertising sales faced hurdles. Barron’s argued that Meta now had “a quickly changing risk profile, one that looks uncomfortable even with a cheap stock.”
Meta bulls, nonetheless, argue that the stock, now trading with a valuation below that of many electric utilities, is a bargain. The company’s problems are fixable, they say, and revenue and profit growth should accelerate in the second half of 2022.
“There is deep skepticism about Facebook—more so ever,” says Mark Mahaney, an analyst at Evercore ISI. He has an Outperform rating and a $350 price target on the stock. “There is enormous upside in the stock. The risk/reward is very favorable.”
The FactSet consensus earnings estimate for 2022 has come down to $12.59 a share from $14.26 since the profit report on Feb. 2.
Meta’s earnings for the fourth quarter of $3.67 missed the consensus by 5%. Worse was guidance for the current quarter of $27 billion to $29 billion in revenues, below the consensus of $30 billion, and up just 3% to 11% from the year-earlier period. The earnings consensus for the current quarter is $2.59 a share, down 21% from the year-earlier period.
“When we talk to advertising agencies, they say the best ROI [return on investment] for their clients is Facebook,” says Mark Stoeckle, chief executive officer of the Adams Funds. Meta is one of the largest holdings in the $2 billion Adams Diversified Equity fund, a closed-end fund trading around $18, a 14% discount to its net asset value.
“This management team has worked through challenges in the past,” Mahaney says. This includes the shift to mobile usage of Facebook a decade ago and its rollout of Facebook Stories to counter Snap. Stoeckle adds that Facebook should be able to blunt the TikTock challenge with Reels and some of the impact of Apple’s privacy standards.
CEO Mark Zuckerberg is betting big on the metaverse, and the company is spending heavily on Facebook Reality Labs. The Reality Labs lost $3.3 billion in the fourth quarter and Mahaney sees that business losing $4.70 per Meta share in 2022.
In addition to that heavy spending, Meta plans to boost its capital expenditures to $29 billion to $34 billion this year from $19 billion in 2021, which will cut into free cash flow.
Meta is committed to the metaverse despite doubts about the ultimate profitability. Without the reality labs spending, the company could earn over $17 a share this year, which would bring down its forward price/earnings ratio to 13. Factor in Meta’s $48 billion in year-end cash and the effective P/E with and without the metaverse spending is lower.
Meta’s P/E is lower than its megacap tech peers.
(AAPL) trades for about 27 times its projected earnings in the next 12 months.
(MSFT) has a P/E of 29;
(GOOGL), 23, and
(AMZN), 59. Meta’s market value of $600 billion is less than half that of any of it big tech peers.
Meta, meanwhile, stepped up its stock buybacks in the fourth quarter, repurchasing $19 billion of stock, or more than 40% of its total 2021 buybacks of $45 billion. Meta paid an average of about $327 a share—way above the current price—in the fourth quarter and continued the aggressive buyback pace into January, repurchasing another $6 billion through the date of the 10-K on Jan. 28, Barron’s estimates.
Meta probably paid about $320 a share on average in January for that stock just ahead of its disappointing fourth-quarter release when management presumably had some idea about the outlook for the current period. This suggests that Zuckerberg thought the stock was attractive at a $100 a share premium to the current price.
That is a bullish sign, as is a valuation below that of utilities for a company that stands a good shot at delivering better profit growth than electricity providers in the coming years.
Write to Andrew Bary at firstname.lastname@example.org