UK Markets closed

Is the Meta share price too cheap to ignore?

Young Black woman looking concerned while in front of her laptop
Young Black woman looking concerned while in front of her laptop

If I’d invested £1,000 in shares of Meta Platforms (NASDAQ:META) a year ago, I’d be able to sell my investment for £265 today. In other words, the Meta share price has fallen by 74% in the last 12 months.

The number of users on the company’s social media platforms, though, is as high as it’s ever been. So does the recent decline mean that the Meta share price is too cheap to ignore?

Why is the Meta share price falling?

Despite its strong user numbers, Meta’s business has been facing a number of headwinds. Its advertising business has struggled in the last three months and its metaverse business continues to lose money.

At its most recent earnings report, Meta announced that revenues from its social media platforms were 4% lower than they were a year ago. But higher costs meant that operating earnings declined by 28%.

Is this a problem? I don’t think so – Facebook’s lower advertising revenue seems to me to be part of a broader decline in digital advertising spend that I think will correct itself with time.

The second issue is that its metaverse business seems to be losing more and more money. Over the last three months, Meta has lost around $3.6bn through its Reality Labs segment.

This seems to be the main issue concerning investors. But the company’s metaverse losses are nothing new, so why do investors suddenly think there’s a problem?

I think that the answer is that both Meta’s operations are struggling at the same time. Against a backdrop of a strong social media business, the metaverse losses are less of a concern than they are when the advertising business is also struggling.

Are Meta shares cheap?

There are clearly challenges for the company to deal with in both its operations. But are Meta shares just too cheap to ignore at the moment?

Over the past 12 months, Meta Platforms reported $26.4bn in free cash flow. The current market cap is $237bn, which implies a price-to-free-cash-flow ratio of nine.

That looks cheap. But Meta’s cash flow statement gives me reason to think that its shares might not be as cheap as they first appear.

The company’s $26.4bn in free cash flow includes $11.39bn in stock-based compensation. This is the value of shares distributed to employees.

Since stock-based compensation isn’t paid in cash, it doesn’t count against Meta’s free cash flow. But the company has to spend that amount on share buybacks to avoid diluting the value of its existing shares.

As a result, I’m inclined to think that the stock isn’t as cheap as it looks. Factoring in stock-based compensation implies that the price-to-free-cash-flow ratio is closer to 16.

Should I buy Meta stock?

As an investor, I think it’s important to be realistic about Meta Platforms. The company’s ongoing stock-based compensation expense is my biggest concern with the business.

In terms of the headwinds facing the advertising business and the metaverse project, I think that the market is overly pessimistic. I expect these challenges to subside over time, leaving a strong business.

I own Meta shares in my portfolio, and I’d buy more today to be greedy when others are fearful.

The post Is the Meta share price too cheap to ignore? appeared first on The Motley Fool UK.

More reading

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Stephen Wright has positions in Meta Platforms, Inc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022