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.

Is this sell-off an opportunity for me to buy?

A numbers problem

The company reported adjusted earnings of $1.64 a share on revenue of $27.7bn. This was below analysts’ expectations. More worryingly, net income fell to $4.4bn from $9.19bn a year earlier.

Investors aren’t convinced by the company’s pivot to the metaverse, a move which lost it $10bn in 2021 alone. Its Reality Labs division, which its VR headsets are part of, has now lost a further $9.4bn so far in 2022.

Revenue in this segment actually fell by almost half from last year to $285m. Meanwhile, the company anticipates Reality Labs operating losses in 2023 to “grow significantly year over year“.

Weakening demand for digital advertising is also hurting the company, though Alphabet also reported underwhelming earnings this week, suggesting an industry-wide slowdown in advertising.

One positive was that monthly active users on the group’s platforms increased 2% year on year to 2.96bn. So this is a company that still has massive scale. That will continue to be attractive to advertisers.

An innovation problem

For a long time, Facebook (as it was) was able to acquire competitors (Instagram in 2012, WhatsApp in 2014) or introduce similar innovations to those of its peers. For example, it unveiled its Stories feature in 2017, which included disappearing photos and videos, just like Snap‘s Snapchat.

Most recently, in 2020, it introduced Reels to Instagram, a feature allowing users to make short videos set to music. This is similar to TikTok.

Of course, within the world of business, it’s common for a company to recognise popular innovations and adopt and adapt them for itself. In fact, a company’s survival could literally depend on anticipating the ambitions of its rivals.

Video-rental giant Blockbuster, for example, had the chance to buy Netflix for $50m in 2000. If the deal had gone through, Netflix would have managed Blockbuster’s online business. Apparently the Blockbuster CEO struggled not to laugh at the offer and turned it down instantly, and the rest is history, as they say.

To its credit, Meta has not been so naive in recognising threats from competitors. But I do think the company’s lack of innovation in its main platforms is finally catching up with it in the shape of TikTok.

A TikTok problem

Just four years after launch, TikTok landed its billionth user in 2021. This was half the time it took Facebook or Instagram. That user figure is expected to reach 1.8bn by the end of this year. TikTok is the most lucrative platform in the world for in-app purchases.

ByteDance, the private Chinese parent company of TikTok, is now the world’s most highly-valued unicorn, at around $300bn. I always take private valuations with a pinch of salt, but it’s striking that this $300bn figure is now more than Meta’s market value after its recent collapse. TikTok is the most formidable competitor the company has ever faced.

All in all, I think there are better alternatives for my portfolio today than Meta stock.

Revenues came in at $27.71bn, which was 4.5% lower than last year. Earnings per share were 49% lower at $1.64.

So, should I look to add to my investment as the share price goes down? Or should I sell as the underlying business continues to struggle?

Earnings

Meta divides its operations into two segments – the Family of Apps and Reality Labs. The former includes Facebook, Instagram, and WhatsApp and the latter contains the metaverse projects.

Both reported disappointing results. The Family of Apps revenue was down by around 3.6% and profits were 28% lower than a year ago.

Reality Labs reported revenues that were around 49% lower. The segment’s losses also increased.

As a result, the losses at Reality Labs accounted for around 40% of the profit made through the Family of Apps segment. That’s the highest that ratio has ever been. It meant Meta’s overall operating margins went from 36% to 20%.

For the fourth quarter, the company forecast that it would bring in between $30bn and $32.5bn in revenue.

Should I buy Meta shares

Compared to a year ago, revenues at Meta are down a few percent, earnings per share are down 49%, but the stock is down a disproportionately large 66%. So should I buy the shares?

I think so. The results from the Family of Apps segment don’t highlight any significant weakness in the business and it could offset the losses from the metaverse business.

As I see it, the headwinds that the advertising business is facing are the result of the current economic climate, rather than the business itself. Digital advertising results have been weak across the board recently. Alphabet also reported underwhelming earnings this week, indicating that the issue isn’t just with Meta.

And the number of users on Meta’s platforms remains strong. The company reported higher daily and monthly users across all of its platforms, including Facebook.

I therefore think the Family of Apps segment will recover as the economic climate improves. I’d expect weaker earnings in difficult times, so I’m not worried about the latest results.

That leaves the metaverse ops, which I see as a bigger issue. Without a clear path to profitability, this is a significant risk.

Investing in Facebook

Overall, I think advertising profitability should recover to outweigh metaverse losses over time. As a result, I’m looking to buy the stock at these prices.

I started investing in Facebook at the end of last year. Back then, the stock was falling due to declining daily active users, but the company was producing solid financial results.

Today, the reverse is true. The number of users on Meta’s platforms seems stable, but the company is making less money.

I see this as a temporary issue though. As the economy improves, I think that Meta Platforms will prove to be a great buy for me at today’s prices.

Legal & General

The first share that I’m considering is Legal & General (LSE: LGEN). There is an elephant in the room though. Recently, the pensions market has been in turmoil. Some pension providers have been forced to sell bonds and shares to meet demands for cash. Legal & General has reassured investors that it is not one of these forced sellers. That being said, this turbulent period highlights that there are risks in this business.

The long-term picture for Legal & General gives me more confidence. The demand for insurance and pensions tends to be robust. While the company may not quite have an economic moat, it is a well established brand with a large customer base.

The share price has tumbled 20% in the last 12 months. It now trades at a price-to-earnings (P/E) ratio of just 6.6. That looks cheap to me given that its median P/E in the past decade has been over 10. This is also an attractive investment from an income perspective. It yields over 8% and the company has set out plans to increase dividends annually until 2024. While dividends are never guaranteed, this one is well covered. Even in times of economic turmoil, this healthy dividend could provide a cushion for my portfolio. 

Meta

The second share I like is Meta (NASDAQ: META). I don’t own Meta shares in my portfolio today but I’d be happy buying at today’s prices. Down 60% in the last 12 months, I believe Meta has been oversold. Any investment decision I will make has little to do with its huge investments in the metaverse. Whether these pay off or not is purely speculation at this stage. Digital advertising remains the core business for Meta.

Yes, it has lost market share, and user growth across its products has started to slow. There are also headwinds in the form of iOS privacy changes and a slowing economy. However, it remains attractive to global advertisers. As the macroeconomic picture brightens, I’d expect investor sentiment to improve. Third-quarter results will be released at the end of the month. I’m particular keen to see whether the growth in Reels, its short-form video offering, continues.

With a forward P/E of 10.7, it could be a compelling buy for my portfolio. Its advertising business generated $115bn in revenue with an operating profit margin of 49%. The slowing growth may already be priced into the stock at these levels and I think the stock looks like a bargain today.

I own a number of ‘Big Tech’ stocks (Apple, Amazon, Alphabet, Microsoft) in my portfolio but I don’t currently own Meta. Is it worth picking up a few shares near the $130 mark? Let’s discuss.

Should I buy Meta stock today?

Meta stock certainly looks cheap at the moment. At present, Wall Street analysts expect the tech company to generate earnings per share of $9.85 for 2022. At the current share price of $128, that puts the stock on a forward-looking price-to-earnings (P/E) ratio of 13 (assuming earnings actually come in at that level).

To put that multiple in perspective, Alphabet (the owner of Google), Meta’s main rival in the digital advertising space, currently has a forward-looking P/E ratio of about 19. So, on a relative basis, Meta stock appears to be quite cheap at the moment.

Cheap for a reason?

Comparing Meta’s products and services to those of the other Big Tech companies however, I’m wondering if the stock deserves to be cheap?

There’s no doubt that Alphabet has some fantastic services in Google and YouTube. I use Google every single day for work, shopping, travel planning, and more. And I’m increasingly using YouTube for work and entertainment too. These services provide an immense amount of value to the user.

Apple, Amazon, and Microsoft also have amazing products and services that offer a lot of utility. I have come to depend on my iPhone for communication, on Amazon Prime for next-day delivery online shopping, and on Microsoft’s Office and Teams for work.

Do Meta’s services offer the same level of value to the user? I’m not convinced they do. When I open up Facebook these days, I’m literally hit with a barrage of advertising spam, some ‘Reels’ I have no interest in, and some suggestions for groups that I’m not interested in joining. There’s very little real content from friends and family anymore. As such, I could easily live without the service.

I suspect I’m not the only one who feels this way. In recent quarters, Facebook’s user number growth has stalled. So, perhaps a lower valuation is appropriate here?

Can it turn things around?

Maybe things will all change. After all, Meta is going all in on the metaverse. Currently, it’s spending about $10bn a year in an effort to be a winner here. Who knows, in 10 years’ time maybe its metaverse will be an indispensable part of our lives?

At present however, I think the other tech giants have superior offerings to those of Meta. So I’m going to stick to the Big Tech shares I currently own and give Meta stock a miss for now.

At first sight, the investment proposition looks very attractive. Meta is a highly profitable business with a strong balance sheet and it trades at a price-to-earnings (P/E) ratio of just over 11.

Fair enough, so why has the stock been falling? One answer is that the stock market in general has been coming down as interest rates rise to combat inflation.

But Meta has fallen more than most of its peers. The S&P 500 is only down 21% since the beginning of January.

As I see it, the biggest issue concerning investors at the moment is the possibility of Apple disrupting Meta’s business. I think this is a legitimate concern, but I’m still happy to buy the stock.

Apple

Meta makes its money by selling advertising space. One of its main selling points is that it is able to target specific adverts to audiences that might be receptive to them.

Apple has made recent moves to stop companies collecting user data, which is what makes targeted advertising possible. This threatens Meta’s core offering. If it can’t target its advertising, it becomes less attractive.

There are two things that I’d note here. First, Apple only accounts for about 23% of the global smartphone market, meaning that its effect on Meta’s business is likely to be limited.

Second, even if Meta is less efficient in targeting users, it still has a lot of users on its platforms. I think that this, by itself, means that the company will continue to be attractive to advertisers.

According to its last report, Meta has 2.88bn daily active users across all of its platforms. That’s significantly higher than any of its competitors.

It’s probably fair to say that the number of users is unlikely to grow at the rates it once did. But I think that the company has reached a size where it’s attractive enough as it is.

Valuation

In addition to pressure from Apple, there are some other headwinds for the company to contend with. Most obviously, Meta is currently investing significant cash into its metaverse operations.

This might well weigh on the company’s overall profitability. But I think that slowing growth is already priced into the stock at current levels.

I think that the business is currently priced for a 6.7% annual return. From there, I don’t think that it needs to grow much to be a viable investment proposition for me.

If the company can grow its free cash at 4% annually for the next decade, that’s an average annual return of 8%. Even with the current headwinds, I think that’s achievable.

That’s why I own Meta shares in my portfolio. And it’s why I’d be happy buying more at today’s prices.

How does the Berkshire Hathaway CEO assess intrinsic value? According to Buffett himself:

If you attempt to assess intrinsic value, it all relates to cash flows. The only reason for putting cash into any kind of investment now is because you expect to take cash out. Not by selling it to someone else, because that’s just a game of who beats who, but by, in a sense, what the asset itself produces. That’s true if you’re buying a farm, it’s trut if you’re buying a business.

As Buffett sees it, the intrinsic value of a business has nothing to do with what its share price will be in the future. Instead, it is solely a function of the cash the business will produce.

Earnings

Take Apple (NASDAQ:AAPL) as an example. The company produced $6.05 in earnings per share this year and this is forecast to rise to $6.90 by 2024.

For Buffett, the intrinsic value of Apple shares has nothing to do with what its share price will be in 2024, or what its price-to-earnings (P/E) ratio will be. Rather, it is just a matter of how much the company makes. 

Right now, Apple stock trades at $157. According to Buffett, if the company produces $6.90 in 2024, then the return for an investor who buys shares today will be 4.39% in that year.

Importantly, it has nothing to do with whether the share price will be $140, $160, or $190. That, for Buffett, is a game of who beats who, not investing.

A stock I’m buying

Put simply, Buffett attempts to calculate the intrinsic value of a business by comparing the cash it will generate in the future to its current price. When I do this, there’s a stock that clearly stands out to me as a bargain right now.

That stock is Meta Platforms (NASDAQ:META). It’s a stock I own in my portfolio and I think that its shares are undervalued at the moment.

At the moment, the risk to the company is its Reality Labs segment. Last year, Meta spent around $10bn on its metaverse business and it will be some time before that investment is expected to pay off.

In my view, however, the current share price more than justifies the risk. Despite its significant metaverse spend, the company generated $35bn in free cash last year.

What does that mean by Buffett’s standards? It’s a return of around 8%, which I think is attractive with interest rates solidly below 3%.

The price for the entire business is currently just under $438bn. But the company also has $16.6bn in cash and $13.9bn in debt.

That gives a value for the whole business of around $435bn. Against this, an annual return of $35bn looks strong to me.

The share price might go anywhere, but that’s not how Warren Buffett thinks about his investment returns. Despite its significant capital expenditures, Meta Platforms generates huge amounts of cash, which is why I’m buying shares at these prices.

While I own a number of Big Tech stocks in my portfolio, I don’t currently own Meta. Has the recent share price fall presented an opportunity to pick the stock up at a bargain valuation? Let’s discuss.

Meta stock looks cheap

Let’s start with the valuation because Meta shares certainly look cheap right now. At present, Wall Street expects the company to generate earnings per share of $10.10 for 2022. That means at the current share price of $160, the forward-looking P/E ratio is just 15.8.

There’s no doubt that valuation is low, certainly compared to the company’s average historical valuation (it’s often been 30+ over the last decade). It’s also low compared to other Big Tech stocks such as Apple (26), Alphabet (22), and Amazon (343). And it’s lower than the US market (17.5) as a whole. So there could be some value on offer here.

It’s worth noting that in the last quarter, the company bought back $5.1bn worth of its own shares. This suggests management believes Meta stock is cheap right now.

Cheap for a reason

The thing is though, cheap stocks are often cheap for a reason. And that appears to be the case here. For starters, growth has really stalled. In the last quarter, Meta’s revenue fell 1% year-on-year (its first ever drop in quarterly revenue). And the group forecast another quarterly revenue decrease for the current quarter.

Secondly, profitability has declined. The table below shows that in Q2, net income fell to $6,687m from $10,394m a year earlier – a 36% year-on-year decrease.

As for why revenue and profits are falling, much of it is related to weakness in the digital advertising market. On the Q2 earnings call, CEO Mark Zuckerberg said he believed the economy was entering a downturn that would have a “broad impact” on digital advertising.

Major challenges

It’s not just lower digital advertising spending that’s problematic here though. Additionally, Meta has to deal with:

• Slowing user growth. In the last quarter, Facebook had 2,934m users versus 2,936m in the prior quarter.
• Apple’s privacy changes. These have made it harder for Meta to target users with ads.
• Competition from TikTok. Meta is trying to compete with TikTok using ‘Reels’. However, this is cannibalising more profitable content and leading to unrest among Instagram users.

Metaverse

On top of all this, there’s the uncertainty related to the metaverse. Right now, Meta is spending a ton of money (about $10bn per year) to develop this new technology platform.

The problem is, no one knows whether this will pay off. Meta could end up being a leader in the metaverse space. Or it could be beaten by other companies such as Microsoft.

My move now

Now, Meta Platforms could overcome all these issues. It has overcome challenges before. However, given the number of challenges, I’m happy to leave the stock on my watchlist for now.

All things considered, I think there are better shares to buy right now.

I’ve looked at the company’s earnings report. I think that the business is still in great shape and I’m looking at buying more shares.

The report

With Meta, there are two things that I pay attention to. The first is how much money the business is making and the second is how the company’s user base is developing.

On the profitability side, the report didn’t look strong. Net income came in 36% lower than last year and revenues were largely unchanged.

In terms of users, the company reported a decline in monthly active users on Facebook. Average revenue per user on Facebook was also lower compared to a year ago.

Those are the headlines and there’s clearly some disappointing news. But I don’t think that the report justifies the decline in the Meta Platforms shares price.

As a shareholder, I believe that the report indicates that the company is in decent shape. I see the bad news as the product of a difficult environment, not a problem with the business.

Earnings

Let’s start with the company’s earnings. A decline in net income is clearly a bad thing, but I think that looking at the wider context is helpful here.

The last three months have been difficult for digital advertising companies across the board. Snap, Twitter, and Alphabet have all identified lower demand in the online ad space.

This is due to businesses cutting back on their marketing budgets. With this in mind, I’m not surprised to see Meta also reporting lower income numbers.

I’m unconcerned by the disappointing numbers. In my view, the company’s net income tells me more about the macroeconomic situation than the state of the underlying business.

Users

I think that the number of users on its platforms gives a better idea of how the company’s core business is doing. More users means a bigger audience for advertisers, which means more income for Meta.

Declining monthly active users on Facebook isn’t good. But I also saw reason for optimism in the report.

The number of daily active users increased from 1.96bn to 1.968bn. This is encouraging, particularly following the decline at the end of last year.

There were also small increases in the number of daily and monthly active people across the broader Family of Apps. This indicates to me that Meta’s user base remains fairly robust.

Meta stock

The company’s earnings are lower than they might have been. But my conclusion is that this is the result of a temporary headwind.

A difficult economic environment is dampening demand for Meta’s services. But I think that this will subside and when it does, the company will once again do very well.

A 4.5% decline in the Meta share price only undoes the effects of the previous day’s trading, when the stock increased by 6.5%. I therefore don’t see the fall as particularly significant.

In my view, the stock is roughly the same investment proposition it was yesterday. Since I would have bought it then, I’d buy it now.

With a price-to-earnings ratio of 12, is this now a screaming bargain buy for my portfolio?

The bull case

With investor sentiment towards the company having soured, I think it is worth recapping just some of the things that make the business attractive. Its collection of social media platforms is integral to the daily lives of vast numbers of people and businesses. In March, 2.9bn people were counted by the company as active on a daily basis. Not only is that number huge, it is 6% higher than in the same period the prior year. Meta remains in growth mode. First-quarter revenues were up 7% compared to the equivalent quarter last year.

The stickiness of such platforms means that many users will continue to use them rather than going to the effort of moving to a new provider. On top of that, Meta benefits from a network effect that means users could not get quite the same experience anywhere else.

That adds up to a sizeable competitive advantage that could help fuel profits. The company is already strongly profitable. In the first quarter, it reported profits of $7.5bn.

The bear case

Given all that, why have many investors been dumping Meta? One concern is the durability of its competitive advantage as users move to other platforms. I do see this as a risk but that has always been the case. Facebook has grown through giving users what they want. Acquisitions such as Instagram have also allowed it to reshape its customer base quickly. I do not think the company’s platforms are going to fade into irrelevance in the short term.

There have also been concerns about executive changes such as the planned departure of the company’s chief operating officer. I do not think such moves should make much difference to the long-term investment case of a company with a proven business model and the scale of Meta.

My move on the Meta share price

After the Meta share price collapse, I now think the company looks attractively valued. I like its long-term prospects and strong competitive advantage.

Over recent days, I have been thinking about adding it to my portfolio at the current price. But as I started thinking more about a potential purchase, I realised that I am uncomfortable about the impact I think some of the company’s social media platforms are having on society. Foolish investing targets being richer, but also happier. I do not currently think that owning a slice of Meta would make me happier.

Yet I own tobacco shares and would happily own shares in alcohol companies, both of which produce products that can be socially harmful. But for some reason I do not feel I want to own even a small part of Meta. Every investor has their own priorities. I do think the current Meta share price looks like a bargain and potentially buying it now could help make me richer in future. But despite that, I would rather hunt for other bargain shares I can buy for my portfolio instead.