Is Facebook Stock A Good Investment Now?

By Ethan Sa and Eshan Gupta

After reporting lower than expected revenue growth for Q4 of 2021, Meta Platforms Inc.’s (current stock price = $198.50) stock dropped 25%, which was its largest one-day drop on record. As a reminder, Facebook is one of the parent company Meta’s social media platforms, including Instagram, WhatsApp, and other services. Its market capitalization was reduced by nearly $200 billion on the fateful day of February 2, 2022. 

Analysts estimate company growth with several key metrics such as EPS (earnings per share) and revenue. Earnings per share is an important metric as it is the value of the earnings per stock or share that the company has issued and determines investor confidence and value of the company. Facebook reported an EPS of $3.67 during its earnings, below the expected $3.84. Analysts predicted revenue of $33.4 billion, but Facebook narrowly beat targets with a revenue of $33.67 billion. They also take into factors such as product usage, competition, and demand. For example, daily active users were reported as 1.93 billion, a little below the 1.95 billion that analysts predicted. Although only missing on EPS and user metrics, analysts were concerned as Facebook predicted Q1 2022 revenue would be $27 billion to $29 billion, but analysts had predicted revenue levels around $30 billion. According to Facebook, lower-than-predicted revenue was due to Apple’s new privacy features, which blocked tracking users’ data and made advertising on iOS devices less effective. Explaining the disappointing estimates for future revenue, Facebook blamed rising inflation and supply chain issues that lowered advertising companies’ revenues, leading to less revenue for Facebook. Feeling the pressure to increase growth, Meta had to take actions such as increasing the time for screen time limits on Instagram to get users to spend more time on the platform. 

Investors are starting to question if the stock was heavily oversold, and with the stock now at a significant discount, is it time to invest in Meta Platforms Inc? Let’s look over the company and determine the pros and cons of Meta stock. 

What is Meta Platforms Inc., and how does it generate revenue?

Meta is a primary social media company that offers several social media products such as Instagram, Facebook, and WhatsApp. They also offer VR products like Oculus. As the second-largest advertising platform, Meta earns almost all of its money mainly by selling advertising slots to other companies and the “clicks” those ads receive from users. You can think of it with this analogy: Imagine you’re scrolling through Tom Brady’s Instagram feed. You like his posts, and check out the “tagged” NFL accounts. You go and like posts on their page. Now, while scrolling through stories, you see ads for NFL merch, and you click to visit their website, and you consider asking your parents if you can buy the new Chiefs jersey. Behind the scenes, you’ve earned Instagram some money! Instagram has analyzed your interests by your activity and has shown you ads where you’ll likely click them. Once you click the ads, the company that’s advertising will give Instagram some money for bringing you to their platform. Then, since many people will make a purchase, the company that’s advertising will earn some money too. This is how Meta has become such a valuable and highly profitable company! 

Competition

One of Meta’s most significant threats is the rise of Tik Tok, which has started to raise concerns within the company. Meta knew it had to stay ahead of the competition or lose users. As a result, the “reels'' feature on Instagram was introduced to counter Tik Tok’s popularity. The downside is that “reels'' generate less revenue than other features of Instagram. Other competitors to Meta include Snapchat and YouTube, with Snapchat offering a messaging platform while YouTube is offering their rival to Instagram reels and TikTok, Youtube “shorts.”

Facebook also faces a fair bit of competition from Twitter: both platforms provide similar services such as blogging.

Meta valuation 

Although predicted Q1 2022 revenue and Q4 2021 earnings results were lower than expected, Facebook is transitioning into the “metaverse,” which will undoubtedly bring more revenue and is taking steps to fight the competition. Facebook has demonstrated consistent revenue and user growth over the past few years, with this earnings report being the first to demonstrate the impacts of increased competition and inflation. However, many analysts see a bright feature in Meta, with most analysts having ”buy” ratings and only a few having “sell” ratings. Bullish investors have the stock priced at $300 due to continued use by billions of users worldwide, expansion of the “metaverse,” and the current low price, which represents a great buying opportunity for long-term growth. On the other hand, bearish people price it at $120 with concerns with company issues and slowing growth due to declining ad revenue. If you invest with ESG in mind, Facebook falls well short in this category. Its platforms have been proven to have a negative influence on its users.

An example of this is Instagram. Studies have proven that Instagram has created issues with body image among teenage girls, which has led to unhealthy behavior. Furthermore, the stock has continued to drop recently due to the Ukrainian - Russian War, which threatens to disrupt global trade and economies due to rising energy costs and sanctions. 

Conclusion

Although there is significant controversy on the negative political and social influence of Facebook, more than a billion people worldwide continue to use the platform daily. In fact, a reported 70% of American adults use Facebook daily. On one hand, Meta is likely to keep growing with its development of the “Metaverse” and massive user base. However, stiffening competition and stagflation combined with deepening world crises remain a big threat to the immense growth the company has enjoyed in the past.