Will Meta Stock Recover?

Following its last earnings report, shares of technology giant and Facebook parent company Meta Platforms (NASDAQ:FB) slid by 26 percent, erasing more than $200 billion in total value. The fall marked the largest single-day losses for an individual stock in the history of the US market.

 

This sudden and dramatic drop in market capitalization has left many investors wondering where Meta will go from here. Will Meta stock recover?

The rout of Meta stock began as the result of a lackluster earnings report for Q4 2021. The company reported earnings of $3.67 per share, missing the consensus estimate of $3.84. User numbers were also slightly off expectations, with the company reporting 1.93 billion daily active users against an estimate of 1.95 billion.

 

The larger issue with the report, however, was the company’s guidance for Q1 2022. Analysts had estimated $30.15 billion in revenues for the first quarter of this year. According to Meta’s guidance, however, the range will be between $27 billion and $29 billion. This, combined with the earnings miss for the last quarter, shows the company potentially entering a period in which it will struggle to maintain its high levels of growth.

User behavior also appeared to be turning against Meta. On the Facebook platform, users are increasingly turning to video content through the Reels feature. Advertising products on these videos monetize at lower rates than the benchmark Facebook newsfeed. As a result, the company is seeing less revenue coming in for each page impression it receives.

 

The company saw large losses on one of its leading projects, Reality Labs. This division is the part of the company mainly tasked with developing new augmented reality and virtual reality technologies. Reality Labs generated $877 million in revenue in Q4. Its operating losses, however, were extremely steep at $3.3 billion.

 

Meta is also facing external challenges. Privacy changes at Apple, supply chain difficulties and inflation have eaten into the company’s bottom line. Conflicts over data privacy regulations have also called the continuation of Facebook and Instagram service in the European market into question.

 

These factors, combined with lower earnings and more modest forward guidance, have effectively created a perfect storm for Meta from an investor perspective.

 

Often, a selloff as drastic as the one Meta experienced is rapidly followed by a partial recovery. In Meta’s case, however, investors have remained bearish through the time of this writing. Share prices continued to decline slightly, and there are no immediate signs of a near-term recovery.

 

However, Meta still has ample room to bounce back. The company’s best hope for a full recovery is likely its ongoing investment in virtual reality metaverse technology.

 

CEO Mark Zuckerberg has outlined a plan for Meta to transition toward this technology and away from its core social media business in the coming years. According to Zuckerberg, the metaverse will open up markets for new digital goods and services. If Meta successfully positions itself at the center of such an innovative new market, an eventual recovery seems likely.

 

Despite the enormous drop in overall value, the news from the Q4 earnings report wasn’t all negative. Revenue for the quarter slightly outperformed expectations, with the company bringing in $33.67 billion against an estimate of $33.4 billion.

 

While future growth may be more muted, there’s little doubt that Meta’s social media platforms are still extremely valuable businesses. It’s also worth noting that the Reality Labs operating losses may not be as large in future quarters as the business begins bringing in more revenue to cover its expenses.

 

Overall, an eventual Meta recovery is very probable. The question, however, is how long that recovery will take. A more favorable than expected Q1 earnings report, for example, could put the stock back on track in relatively short order.

 

If the stock has to wait for the commercialization of the metaverse to regain its momentum, investors could be looking at a longer period of lower gains. It does not seem likely, however, that Meta will remain at its current depressed pricing indefinitely.

 

Meta bulls argue that the recent selloff may have left the company undervalued. After the 26 percent drop, the company’s stock traded at only about 16 times future earnings estimates. With other FAANG stocks valued at ratios of over 20, this could make Meta an attractively priced investment among the tech giants.

 

Assuming the company’s investments in metaverse technology begin to pay off significantly in the future, growth could begin to speed up again. The global metaverse market is expected to grow by a staggering compounded annual rate of 41.7 percent through 2030, leaving Meta in a strong position to take the lead in a potentially huge market.

 

With new growth from metaverse products, Meta could return to double-digit growth levels. At its current pricing, that would make the company a good investment for the future. As a result, investors who buy at today’s prices could reap large profits as Meta becomes a dominant force in the virtual reality world.

With that said, lower monetization rates as users engage with products outside the Facebook newsfeed could still be concerning in the long run. This is especially true if it takes Meta several years to begin generating significant revenues from its virtual reality and augmented reality technologies.

 

Based on its currently low pricing compared to earnings estimates, Meta would seem to be at least slightly undervalued. Assuming robust future growth, that undervaluation could be quite significant. A more conservative view, however, would place Meta as a somewhat undervalued company nearing maturity.

 

At the moment, the question of whether to buy Meta stock or not seems to hinge on the performance of metaverse technology. Explosive growth of interactive virtual reality as envisioned by Mark Zuckerberg would clearly give Meta enormous future potential. In addition to bringing new functionality to its existing social media platforms, an immersive metaverse would open up entirely new opportunities for the businesses that build it.

 

For the past several months, both retail and institutional investors have been seeking out metaverse opportunities in the stock market. Severely depressed prices for one of the leading metaverse companies could favor bullish investors, assuming the technology pays off in the long run.

 

If the metaverse proves to be overhyped, on the other hand, Meta may be less of a bargain at the moment. Slowing growth from its core social media products and a lack of new revenue streams in that category could mean that Meta is approaching maturity.

 

While that won’t prevent the stock from continuing to produce profits, the gains going forward could be more modest if the company is largely reliant on its social media platforms.

 

If you believe that the metaverse is the next large technological innovation, Meta seems like a good buy. An eventual recovery powered by metaverse revenues could produce very large gains, especially for investors who buy while the price is still low. Meta is likely a good buy at its current price for the risk-tolerant investor looking for metaverse exposure.

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