Meta Stock: Trading at a significant discount (NASDAQ:META)
Recovering the losses suffered this year seems like a daunting task for the whole market. However, we believe there is cause for optimism as many tech stocks appear oversold. According to our analysis, Meta Platforms (NASDAQ:META) has room for recovery as the integrated tech powerhouse is well positioned for future growth and its stock price level is attractive after falling more than 50% year-to-date.
Although Meta is a high beta stock (1.41), we believe it could serve investors well, even if a recession were to occur, as the positives far outweigh the negatives; Here’s why.
Vertical Market Analysis
Meta generates almost all of its revenue from advertising (about 97%). As such, most of the stock’s market value should be gauged by segment. The economic challenges that have come our way this year could cause many businesses (and individuals) to cut back on advertising spend. However, even if business spending declines, it won’t necessarily derail the industry as the CAGR (compound annual growth rate) remains robust at 10.4%nearly five times the US GDP annual growth.
Meta owns a large portion of the advertising space and is expected to own 24.1% of the industry by 2023. I would actually say economic turmoil could support Meta’s position in the advertising market as many smaller players are unlikely to be able to withstand a short-term drop in income and, in turn, go bankrupt. In contrast, Meta sports $59.52 billion in cash from operations, which could see it cannibalize much of the growing competition.
Additionally, Meta’s family app template integrates major social media platforms such as Instagram, Facebook, and WhatsApp. Thus, allowing the company to be less sensitive to fluctuations in users relating to the platform. In addition, its range of integrated applications allows Meta to synergize its human capital and evolve its products with maximum efficiency.
Although “Reality Labs” represents only a small portion of Meta’s revenue, many investors are at a crossroads when it comes to spending on the segment versus its potential growth.
Meta’s aggressive spending on the segment contributed to widespread losses worth $6.2 billion in its previous two trimesters. However, the company’s reality lab segment is in hypergrowth mode at 35% year-over-year revenue gain. Additionally, the chart below indicates that costs are outpacing revenue growth. Nevertheless, most of these costs are related to R&D and could decrease over time as the segment is optimized.
Additionally, the forecasted CAGR of Metaverse (a submarket of Reality Labs) (through 2026) is 47.6%. If the Metaverse’s predicted growth comes to fruition, we could see Meta’s Reality Labs being a key segment for the company to maintain its recent growth.
Widespread growth and market relevance
Putting it all together, it’s clear that Meta is a secular growth (or at least high growth) company. The company’s financial gains are in hyper mode on its income and cash flow statements. Although its tangible book value and total assets have declined over the past year, it should be taken with caution, as the assets of technology companies are generally mostly intangible and therefore have fluctuating valuations that do not influence not necessarily the company’s stock price.
Meta’s strong growth status bodes well in the current market climate. Often, investors choose to invest in hypergrowth companies during a bear market because their financial results are not cyclical but rather exponential. Additionally, Meta is a dominant company in its field, presenting it as a safer bet for investors than most other tech stocks. So if risk aversion persists, we’ll likely see investors allocate their capital to big, proven companies like Meta rather than smaller growth stocks.
Valuation and price level
I approached my valuation analysis based on a relative perspective that looks at normalized value peaks and peer group valuations.
Growth companies’ relative valuation measures will almost always read at premiums to their respective line items in the financial statements. As such, it is more productive to compare measurements relative to their cyclical peaks.
Meta’s price-to-sales and price-to-cashflow ratios are at 5-year discounts from 59.89% and 58.18%respectively, suggesting that the stock is undervalued on a cash and an accrual basis.
Additionally, Meta’s P/E ratio is 55.57% below its 5-year average, indicating a gap in value. Additionally, the stock’s PEG ratio of 0.93x implies that the market is underlining Meta’s earnings per share growth.
|Price/cash flow ratio||7.67x|
|Price to earnings ratio (GAAP)||12.36x|
Source: Alpha Research
A peer group analysis implies that Meta is undervalued compared to some of its peers, as its price/earnings ratio is significantly lower. A peer group analysis normalizes the sector’s price-earnings ratio, providing a better indication of the valuation position of the stock being analyzed in the context of its trading activities.
Technical analysis should ideally not be used in isolation. However, the past price of a stock can be used as a lagged variable to determine future prices.
The chart below indicates that Meta recently broke through a support level at the $160 handle, which may last until the $225 handle, where a resistance level is embedded. So, if you are a fan of technical analysis, the chart below implies that now is an excellent time to take a position on Meta stock.
From a qualitative point of view, Meta is facing increasing competition in its industry in the context of increasing digitization in recent years. Although I argued earlier that Meta can cannibalize emerging competitors, one must consider that with a growing industry comes growing traction, which could dilute the overall market share in the online advertising space for existing players.
Regarding market share, Laura Martin de Needham thinks Meta could be set for a tough time. According to Martin, Meta could lose its moat in the coming years, subsequently leading to increased costs and erosion of revenue.
Additionally, Meta harbors quantitative risks. The stock’s Sharpe ratio of 0.696 implies that its risk/reward ratio is misaligned. Ideally, you want to see a higher Sharpe ratio 1.00 as an investor.
Meta’s year-to-date capitulation has brought it to an investment level. The company’s growth rates remain firm despite a declining economy, and its reality labs segment offers it the opportunity to pivot to a more diverse revenue mix. Additionally, quantitative metrics reveal that Meta is undervalued on a relative basis and has reached a price support level.