The price of Meta has dropped. We investigate the causes to see if this presents a buying opportunity for our portfolio.
Near the start of this year, we debated purchasing Meta, the parent company of Facebook (NASDAQ: META). We are relieved that we refrained from doing so. Over the past year, Meta stock has decreased by 66%.
In other words, we can now purchase approximately three times as much for the same amount of money as we could have at this time last year. Ought we?
Some investors believe that the company is now an unbeatable deal. The price-to-earnings ratio is only 11, after all. That surely grabs our attention.
But we notice a few issues with this. First of all, those earnings are old. We’re not confident that things will continue to be so positive. As the recession bites, advertising spending is decreasing, yet Meta is investing billions of dollars in its nascent metaverse platform.
The corporation let off thousands of employees in an effort to save costs. That might be beneficial, but it highlights the widening gap between the company’s expense structure and its revenue. When compared to the same quarter the previous year, sales in the most recent quarter dropped by 4% while costs increased by 19%.
Additionally, there is a chance that user numbers will drop. We anticipate that competitors like TikTok will eventually continue to draw younger consumers who may have previously utilized Facebook. Lower revenues and earnings for Meta could result from that. However, Facebook did record a 3% increase in daily active users in September compared to the same month last year. Instagram and Whatsapp are two other well-known apps owned by Meta. They might contribute to its expansion even if Facebook’s popularity drops.
Currently, however, Meta’s cost base is what has us the most concerned.
It already seems horrible to say that costs and expenses increased 19% when compared to the same quarter last year. But understanding how that affects profitability demonstrates why a corporation can suffer so much from an outsized expense base.
The quarter’s costs and expenses increased from $18.6 billion last year to $22.1 billion this time. This resulted in a 47% decrease in income from operations from $10.4 billion to $5.7 billion when combined with the loss in revenue. This resulted in a 52% decrease in net income.
Costs may continue to be high because Meta is investing billions of dollars in a metaverse platform that doesn’t appear to have many supporters outside the firm.
We won’t be purchasing Meta stock
But if there isn’t much demand for the metaverse, why is the corporation investing so much money in it?
Despite not owning a majority of the company’s shares, the chief executive has a majority vote due to the uneven voting system. This type of skew-whiff corporate governance worries us since it leads to crises like the one we’re in now. It can enable a business to invest heavily in pet projects of an executive team that would only find modest financial success.
Fair enough, Meta might yet get a big return on its investment in the metaverse. It might be a trailblazing visionary. The present Meta stock price may be a steal given that its prior products have demonstrated earning potential.
However, the company’s cost base worries us, and I’m concerned about its corporate governance structure. We also believe that a large portion of its societal influence is quite detrimental. We do not intend to finance the company.
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