Should Investors Buy Meta Platforms Stock Amid the Nasdaq Pullback?

the Nasdaq Composite it is full of high-growth companies, many of which fall under the umbrella of the tech sector. The index is down almost 26% since the start of the year in light of major changes in the macroeconomic landscape: soaring inflation, higher borrowing costs and geopolitical concerns. None of these have boded well for tech stocks of late, prompting a sharp shift toward safer investments such as value stocks and fixed-income instruments.

At the top of the list of defeated tech stocks is the social media giant. Metaplatforms (GOAL -2.18%). Mark Zuckerberg’s business has lost 55% of its market capitalization to date, erasing all the gains the stock had made in the last five years. Is it time to double down on the social media giant, or is there too much going on right now to suggest it’s a worthwhile investment today?

Let’s look at your current situation to try to answer that question.

Image source: Getty Images.

The problems faced by Meta Platforms

Meta Platforms, formerly Facebook, is facing a two-headed monster right now: a declining digital advertising landscape and its own money-losing Reality Labs division.

Most of Meta’s revenue comes from digital advertising, a market that has been hit hard by the increasingly dark economic landscape. In its most recent quarter, ad sales saw a rare year-over-year decline, falling 1.5% to finish at $28.2 billion, representing nearly 98% of the company’s total sales. For context, in the same quarter last year, Meta ad revenue soared 56%. So the social media giant has a problem with its main source of income.

And then there’s its Reality Labs business, the company’s metaverse segment, which focuses on virtual reality (VR) and augmented reality (AR) hardware and software. It’s putting pressure on Meta’s margins and profitability. In the second quarter, Reality Labs generated $452 million in sales, a solid 48% increase year over year. But there is one important caveat: Meta is losing more than six times as much money with Reality Labs as it is making. In the second quarter, the segment suffered an operating loss of $2.8 billion, up from a loss of $2.4 billion in the same quarter last year. And it is aggressively ramping up spending, with its research and development costs rising 43% in the second quarter to $8.7 billion.

Zuckerberg is putting a lot of his chips into the future of the metaverse. But for the moment, the margins of the Meta will suffer the consequences.

How will the social media giant respond?

The decline in Meta ad revenue is not a unique situation. Other businesses like Nap Y Alphabet are also negatively affected. After all, digital advertising is cyclical: During economic downturns, companies have to cut their budgets, and one of the first areas to tone down is advertising. Sure, Meta also faces advertising-related challenges related to AppleiOS privacy changes, but in general, the slowdown in ad revenue is quite natural.

As far as Reality Labs is concerned, no one knows if the social media giant’s aggressive investments will pay off in the long run. The future of the metaverse looks promising, but there is certainly a lot of risk associated with the company’s ongoing transition. That said, I’m not that worried given Meta’s $40.5 billion in cash and marketable securities, and a core business that has 3.7 billion monthly active users (MAUs) on its network. I wouldn’t hit the panic button yet; the company remains very well positioned for future success.

Is now the right time to buy Meta Platforms?

With an ever smoother digital advertising environment and its vast metaverse of transformation, Meta Platforms has a lot of work to do right now. But I like to take a long-term approach, and it’s hard to imagine the social media company not coming back strong due to its MAUs and cash accumulation.

And then there is its price-earnings (P/E) multiple, currently around 12.5, well below its historical levels. Between 2017 and 2021, Meta averaged a P/E ratio of 27.9. Note that the current price-earnings multiple of the broader S&P 500 The index is 20.6, making the world’s leading social media company trade at a discount to the broader market. I think its current valuation gives investors a wonderful margin of safety.

Keep in mind, though, that Meta’s growth is currently nowhere near where it’s been in the past five years, and competition in the digital advertising arena has become much more intense. If that doesn’t give investors a reason to worry about the stock, then its capital-intensive metaverse surely will. There is no doubt that we are in a very different business today, which probably explains why its valuation has taken such a hit. But while we should beware of its fierce competition and ambiguous transformation of the metaverse, it’s also vital to remember that Meta is broadly profitable, cash flow positive, and enjoys the most monthly users of any social media business in the world. world. I understand investors’ concerns, but I think the sell-off has been overdone.

It may be a bumpy ride for the social media titan in the short term, but the company should bounce back in the long run.

Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of the board of directors of The Motley Fool. Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. lucas meindl has positions at Apple. The Motley Fool holds positions and recommends Alphabet (A-shares), Alphabet (C-shares), Apple, and Meta Platforms, Inc. The Motley Fool recommends the following options: long $120 March 2023 Apple calls and short $ March 130, 2023 in Apple. The Motley Fool has a disclosure policy.

Leave a Comment