Inaya Mclaughlin
Should you invest in Meta right now? Well, it depends.
On the one hand, Meta's revenue has been declining, with its total revenue falling year-over-year for the first time in Q2. The company is also facing headwinds from a waning digital ad market and increasing competition from the likes of TikTok. In addition, Apple's privacy changes have cut into Meta's ad pricing and user data collection capabilities, further impacting its ability to sell ads.
On the other hand, Meta's valuation is attractive, with its stock price falling around 50% so far this year. The company still has a lot to offer and is investing heavily in its metaverse business, which could pay off in the long run. Meta also has a strong balance sheet, with $40.4 billion in cash and cash equivalents and $35.1 billion in free cash flow generated in the past year.
So, should you invest in Meta? It depends on your risk tolerance and investment horizon. If you're a long-term investor who believes in the potential of the metaverse and Meta's ability to adapt and grow, then it could be worth considering adding Meta to your portfolio at these lower prices. However, if you're risk-averse and concerned about the near-term economic outlook, you may want to steer clear until the company shows more concrete signs of a turnaround.
What You'll Learn
Is Meta's investment in the metaverse a good idea?
Meta's investment in the metaverse is a risky move that has yet to pay off. The company has faced declining advertising revenue and increasing competition from TikTok and Snap, with Apple's iOS rule changes further denting its ability to sell ads. Meta's plan to emphasise short-form videos and its TikTok competitor, Reels, has also faced a backlash from Instagram users.
However, the metaverse market is forecast to expand at a compound annual growth rate (CAGR) of 51% through 2030, reaching a value of $1.6 trillion. This potential for massive growth means that Meta's investment in the metaverse could pay off in the long term.
Meta's current valuation is also hard to pass up, and the company has a widely profitable advertising business to fall back on. While it may be a risky investment, smart investors should consider buying Meta stock while it's trading at all-time lows.
In conclusion, Meta's investment in the metaverse is a risky move that could pay off massively in the long term. While there are choppy waters ahead, the company is still an enormous one with a profitable advertising business, and its current low valuation makes it an attractive investment.
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What is the impact of declining advertising revenue on Meta?
Meta, formerly known as Facebook, has experienced a decline in advertising revenue, which has had a significant impact on its business and future prospects. The decline in ad revenue can be attributed to various factors, including an economic slowdown, competition from TikTok, changes in Apple's privacy settings, and regulatory risks.
The economic downturn has led to reduced advertising budgets for businesses, resulting in a drop in Meta's ad revenue. This trend is expected to continue, with Meta's CEO, Mark Zuckerberg, cautioning investors about declining revenue in the upcoming quarters. The rise of TikTok and its wildly popular video app has also impacted Meta, with advertisers spending more on TikTok's short-form videos. This shift in ad spending has further contributed to the decline in Meta's advertising revenue.
Apple's privacy settings have also played a role in Meta's ad revenue decline. With Apple allowing users to opt out of data tracking, Meta has lost access to valuable user data, making it challenging to effectively target ads. This has resulted in lower ad prices and a decline in Meta's dominance in display advertising. Additionally, regulatory risks, such as antitrust lawsuits and privacy concerns, have created additional challenges for Meta's advertising business.
To address the decline in ad revenue, Meta is exploring new types of monetisation, particularly focusing on its Reels short-form video platform. The company aims to increase monetisation of Reels content and make it a significant revenue driver. However, this strategy has received mixed responses from users, with some of Instagram's biggest names, such as Kylie Jenner and Kim Kardashian, protesting against the platform's shift towards short-form videos.
Despite the challenges, analysts predict that Meta's advertising revenue growth will stabilise and weather the storm. The stock's attractive valuation, the potential for the metaverse, and the company's strong user numbers make it a potential opportunity for long-term investors. However, with many uncertainties and headwinds, investors should carefully consider the risks before investing in Meta.
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How does Meta's stock valuation compare to its competitors?
Meta Platforms Inc. (META) is currently overvalued by about 31% compared to its intrinsic value. Its market capitalization is 1.4 trillion USD, and its stock price is 537.75 USD.
Meta's main competitors include Tencent Holdings Ltd. Tencent has an average EV/EBITDA of 47.7 and an average EV/EBIT of 62.8.
Compared to its competitors, Meta Platforms has a higher valuation, but it is difficult to make a direct comparison of the companies' relative valuations without more data.
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What are the regulatory risks facing Meta?
Meta Platforms Inc. (META), formerly known as Facebook, is facing regulatory risks from authorities in the US and Europe. These include:
- A Federal Trade Commission (FTC) antitrust lawsuit that 46 US states have joined. The lawsuit seeks to prevent Meta from targeting ads to minors, with the company arguing that this should be decided by a federal judge rather than imposed by the FTC.
- Scrutiny from US lawmakers and several states over allegations that Meta harms young users by promoting addictive features and enabling child predators. This has led to lawsuits and an upcoming Senate hearing where CEO Mark Zuckerberg will testify about online child safety.
- Regulatory pressure from the EU's Digital Services Act and the UK's Online Safety Act, which demand greater accountability from tech companies for their platforms' content. Meta is being investigated by the EU for potential breaches of the Digital Services Act, specifically for stimulating behavioural addictions in children and creating "rabbit-hole effects".
- A Federal Trade Commission (FTC) investigation into Meta's handling of election disinformation.
- A probe by the Attorney General of New Mexico into allegations that Facebook and Instagram enabled child sexual abuse, solicitation, and trafficking.
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What is the outlook for Meta's Reels short-form video platform?
Meta's short-form video platform Reels is part of the company's strategy to win back its declining Gen Z user base. It is Meta's answer to the TikTok craze and the company has been aggressively pursuing TikTok's market share. However, despite accounting for 30% of the time spent on Instagram, Reels ranks lower in weekly usage when compared to its competition.
TikTok remains the leader when it comes to time spent on social media apps, with the average US user spending 53.8 minutes per day on the platform, compared to 48.7 minutes on YouTube, 33.1 minutes on Instagram, and 30.9 minutes on Facebook. Nevertheless, Reels' revenue has been growing, with an annual revenue run rate of $10 billion, up from $3 billion last fall and $1 billion last summer. This growth can be attributed to Meta's ad platform, which makes it seamless for advertisers to place their promotions on the feature.
While Reels currently has lower monetization than other ad formats, Meta is optimistic about its long-term potential. The company plans to increase monetization of Reels content, with CEO Mark Zuckerberg stating that it "will be a tailwind on revenue, but that's not happening in 2022." Meta's advances in AI recommendations are also intended to make it a discovery engine that will show users valuable and relevant content shared across the company's properties.
In conclusion, the outlook for Meta's Reels short-form video platform is positive, with increasing usage and revenue. However, it faces strong competition from TikTok and YouTube Shorts, especially among Gen Z users. Meta's ability to monetize Reels and leverage its AI recommendations will be key to its success in the short-form video market.
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Frequently asked questions
Meta's stock price has been on a downward trajectory, losing more than half of its market value in 2022. This is due to a combination of unfavourable economic conditions and internal issues, such as a weaker-than-expected Q1 earnings report. However, some analysts believe that the stock is now undervalued and that it could be a good time to buy.
Meta is facing several headwinds, including declining advertising revenue, increased competition from the likes of TikTok, and regulatory risk. The company is also investing heavily in its unprofitable Reality Labs segment, which focuses on virtual and augmented reality hardware and software. This is exerting significant pressure on the company's margins.
Meta is still an enormous company with a strong advertising business and a vast user base. Its stock has an attractive valuation after falling around 50% so far this year. The company also has a lot of cash on hand and is well-positioned to capitalise on the growth of the metaverse.
