Why the Meta stock is in a crisis of opinion

It wasn’t long ago that Facebook stock belonged to the FANG group — an acronym for relevant tech growth stocks, which, along with the social media group, still Amazon, Netflix and the Google parent alphabet a castle. It is now called Facebook Meta (NASDAQ:GOLF) — and the meta stock is far from serving as a poster child for high-growth tech stocks.

Because the growth story has – at least temporarily – stalled. The latest quarterly report clearly shows this. And with a view to the future, the Meta share gives rise to only a few growth fantasies.

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That’s how high the turnover and profit on the Meta share was

The Facebook group had to announce a drop in sales for the first time in the current quarterly report for the second quarter of 2022. Sales fell 1% compared to the same period last year to $28.8 billion. Earnings fell 36% to $6.6 billion. The profit margin remains at levels that many other companies can only dream of. But for the meta stock, declining profitability is a problem as it pushes the price-to-earnings ratio higher.

What had already become clear a few quarters ago with a surprising drop in the number of users is now certain: the growth story of the Meta share has been put on hold for the time being. In the current quarter, there may be another drop in sales. If the social media company fails to land the next big hit, it’s hard to imagine a rebirth of the growth story.

Meta-Share: It struggles with these issues

The drop in sales came despite Meta on its platforms Facebook, Whatsapp and Instagram slightly increased the number of active users. So it fails to monetize these users.

The decisive factor here is the competition from the short video platform tick tock and generally reduced ad spend. Among these also had Snap– Quarterly figures led. Also the stricter data protection rules Appledevices continue to progress to Meta stock numbers.

At the same time, it seems that the cost of the meta share is getting out of hand. The number of employees has increased by around a third compared to the previous year. In addition, there are increasing reports that the bad reputations of Facebook and Co are deterring highly talented people from working at Meta. Bad news – especially in the rapidly developing technology industry, good employees are an important competitive advantage.

Virtual reality and the metaverse bring no optimism

This means that the meta stock, if at all, is only mediocre on the exchange. This is also reflected in the current price-earnings (P/E) ratio of around 14, which is below the US market average (as of July 27, 2022).

A rebirth of the growth story currently only seems conceivable if bets on virtual reality and the Metaverse are successful. In the coming years, these ambitions will primarily be cost drivers and problem solvers. Each quarter, Meta spends a ten-figure sum on the development of the virtual platforms. At the same time, the US competition authority kept an eye on the takeover activities of the social media group in this area.

For those who believe in a rebirth of Metaverse’s growth story, Meta stock’s current valuation may present a favorable opportunity.

I am less optimistic. Although Meta stock is priced below the market average at a P/E ratio of 14, this valuation still implies that the Facebook group must maintain current earnings levels for as many years before an investment yields a mathematical return. In the fast-paced world of social media, that’s certainly not a safe bet.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares in and recommends Alphabet (A and C shares), Amazon, Apple, Meta Platforms, Inc. and Netflix. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple.

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