Meta Platforms Stock (NASDAQ:META): A Compelling Near-Term Bear Case
Stock Analysis & Ideas

Meta Platforms Stock (NASDAQ:META): A Compelling Near-Term Bear Case

Story Highlights

Meta is betting it all on the metaverse, and with nothing to show for it as of now. Meanwhile, the markets are in the doldrums, and growth stocks such as META will continue to buckle under pressure.

Meta Platforms (NASDAQ:META) has been going through a rough patch since the start of this year, and it doesn’t look like things will get any better soon. With its cyclical advertising business expected to drag down profits, investors should brace themselves for more bad news as Meta continues its downward trend. It will take at least one more year for these headwinds to pass. Hence, META stock will likely be in a downturn for the foreseeable future. We are bearish on META stock at this time.

META stock is taken a beating in the stock market, with investors shunning risky assets. Since its rebranding, it’s shed a ton of value, as investors are on the fence over its potential to commercialize the metaverse concept. With the slowdown in its core business in recent quarters, it appears that its growth story hinges on the success of the metaverse.

With all its chips going into the metaverse pot, an investment strategy that has yet to show signs of success or promise, investors have done remarkably poorly. It remains to be seen how things will pan out, but I expect the stock to fall further before it picks up the pace again.

Meta Reported Lackluster Operating Results

Meta’s ad-pricing growth has been constricted as a result of the reduced advertising spending due to Apple’s recent privacy changes. However, Meta faces several near-term headwinds, including competition from TikTok and lower efficacy rates for social media ads that should continue through next year. Moreover, it looks like Apple has finally decided to get into the advertising game by building an AdTech platform that will allow it to place ads in its iOS ecosystem apps.

Meta reported disappointing results in its recently released quarterly earnings, which weighed down its stock price. The company’s revenue fell 1% compared to last year, while its EPS decreased 32%.

Meta’s growth may remain under pressure in the near term. The company expects a third-quarter revenue decline of 2-10%, including a 6% currency headwind. This reflects greater Apple privacy issues and structural weakness in Meta’s business model, which could lead to a bigger pull-back in ad spending trends on social media platforms.

META Stock’s Metaverse Bet

The metaverse is one of the fastest-growing industries in modern times, with estimates that it will reach over $1.5 trillion by 2029. The market has three major components: software/platforms, hardware, and services. Meta has a strong presence in all three areas, potentially maximizing its impact across each segment.

However, despite spending billions of dollars in building the Reality Labs segment, it is still only contributing in a minor way to its revenues. At the same time, the weaknesses in its advertisement business have things looking bleak for now.

The key takeaway is that although the company’s organic social media ad revenue growth has slowed in recent years, it has plenty of resources to become a more diverse entity. It has $12.7 billion in cash and equivalents and an additional $27.8 billion in short-term investments, totaling $40 billion in liquid funds.

The company is targeting a 10% cost cut over the next quarter, saving them about $5 billion in expenses. This money can go even further, if necessary, to maintain its competitive edge during difficult economic times that may be coming soon. The company’s zero long-term debt means it can tap into markets during a transition period, especially if we enter another recession.

Is Meta Stock a Buy?

Turning to Wall Street, META stock maintains a Moderate Buy consensus rating. Out of 34 total analyst ratings, 27 Buys, five Holds, and two Sells were assigned over the past three months. The average META price target is $220.76, implying 58% upside potential. Analyst price targets range from a low of $140 per share to a high of $466 per share.

Takeaway: META Stock’s Troubles aren’t Over Yet

Meta’s ad business is growing slower than it had in previous years, so it might not be able to generate as much cash flow for the next few years. Meta’s stock has been a mixed bag over the past year, and it still faces a potential disaster with the markets in the dump.

Meta is betting its entire company on the success of its metaverse project. If they cannot create a successful metaverse, then it will have burned through billions in funding with nothing to show for all that time and effort. Moreover, economic headwinds will continue to affect advertising, and overall revenues should continue to drop. Also, CEO Mark Zuckerberg sounded the alarm on a potential recession

Furthermore, META stock’s valuation is still expensive, as it trades over 14 times its earnings. It has the financial resources to continue investing in its metaverse ambition. However, there is little clarity on how things will pan out in this regard. The Reality Labs segment continues to burn through investor money when investing sentiment is remarkably low. Hence, it’s tough to bet on it at this time.

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