Long-term investors understand that market timing is not important. However, the decision to buy or sell a stock hangs entirely on its valuation: is the market price accurately reflecting a company’s intrinsic value? This is the question I ask myself when considering if I should buy Meta Platforms (NASDAQ:META) stock or any of the FAANG companies in November.
A fall from grace
At the beginning of the year, a share in Meta was worth $338.54. Today, it hovers around $93.16. This represents a 72.4% decrease in the company’s market value. However, this is not the first time Meta’s share price cratered this year.
In February, the technology business saw a 32.6% fall in its share price after it released its full-year 2021 earnings. Investors were not happy with the numbers, and Meta’s shares declined sharply.
In recent days, the same story repeated itself. Meta reported its third-quarter earnings, which were far below analysts’ expectations. The market reacted immediately, punishing its stock price once more.
But where is this technology giant sinking all the money? Well, in building the metaverse. On its website, this digital environment is pitched as a new way to connect and share experiences. It offers several ways through which to deliver this. These are smart glasses, augmented reality, and virtual reality.
It sounds like a great idea. But is it also a good business? Or, more importantly, does the metaverse make sense from an investment perspective?
Intrinsic value vs. market price
The FAANGs – Facebook (now Meta Platforms), Amazon, Apple, Netflix and Google (now Alphabet) – are some of the world’s most valued businesses.
Even after a year of steady decline, their market capitalisation in mid-October was about $3trn. To put this into perspective, according to data from the World Bank, the UK’s GDP in 2021 was £3.19trn.
But price does not equal value. When I am thinking whether I should buy Meta stock or any of the FAANGs this month, I am trying to assess how accurately the share price reflects a company’s intrinsic value.
Discounting a company’s cash flows is one way of trying to gauge its intrinsic value. However, it is not the only way. Something like the metaverse can have substantial long-term commercial appeal. Think about Google in the early years: few investors believed in its business model. Now, it outgrew itself into becoming Alphabet!
Meta’s story could be similar. Its market capitalisation, at the time of writing, is about $247bn. Its cash in the bank is roughly $41bn. Given the company’s track record, I am not assuming that it won’t generate any returns on its investments.
Our world will become even more digitalised. The FAANGs are, in my view, the infrastructure of tomorrow’s economy. It may be worth my time going through the exercise of trying to gauge their intrinsic value and see if they are good investments right now.