Meta (FB) Big Drop: Buy, Sell, Hold?

Important Numbers

1. On Feb 2, 2022, Meta reported strong quarterly and annual results but missed expectations.

2. Revenue for Q4 2021 year-over-year grew by 20%, but total expenses ate away most of their revenue growth.

3. Earnings per share for Q4 2021 was $3.67 compared to $3.88 the prior year.

Why the Big Drop? Forward Guidance

The two major reasons are: increased competition (lower revenue growth) and the metaverse (higher expenses).

1. Meta is expecting slower revenue growth as they focus on Reels (a subpar Tiktok). Monetizing reels is much lower compared to posts and stories. They expect revenue for Q1 2022 to grow between 3%-11%. To put into perspective, for the last 5 years revenue grew by 34% year-over-year.

2. Higher expenses as they focus on developing the metaverse. They expect total expenses to be around $90-$95 billion. Total expenses in 2021 was $71 billion. In the end, higher expenses equals lower earnings.

Valuation: Buy, Sell, Hold?

The big question is do we buy, sell, or hold Meta? This all depends on their expected revenue for 2022. Meta mentioned they expect revenue to grow at 3%-11% next quarter. This is very low for Meta considering they have been growing annual revenue at about 34% for the last 5 years. Additionally, they are focusing on building out the metaverse which will take many years before they can monetize it at scale.

Given all the necessary numbers Meta has provided, we can quickly project out Meta's future earnings. Meta expects total expenses between $90-$95 billion and revenue growth between 3%-11%. The table below shows expected EPS if Meta's revenue grew at 3% (low), 7% (average), and 11% (high). I decided to go with the 7% revenue growth as my baseline target. Meta's historical PE range is between 31 and 20. I took the average (25.5) to arrive at a $235 valuation for Meta.

This valuation does not factor in the potential of the metaverse. At the current price of $230 (as of 2.9.22), you are buying Meta at a fair price and getting the future of the metaverse for free. However, if you do not want to bet on the metaverse, you are buying Meta at a fair price point. I personally do not like to buy businesses at fair value, but wait for it to be extremely undervalued. I will keep an eye out for Meta, but I currently do not own any shares.

Hopefully this article has helped you better understand what is going on with Meta's stock price and whether you want to invest in it or not. I write articles for free to help others better understand the stock market. Subscribe to my email list (Free) to be alerted when I have new articles or stock opportunities.

Disclosures

I am not a financial advisor, all valuations are my personal opinion. I do not own any shares of FB. Invest at your own risk.