The share price of Meta Platforms Inc. (META, Financial) has undergone significant volatility, as evidenced by its dramatic fluctuations. In September 2021, the share price stood at $379 per share, but by October 2022, it had plummeted to nearly $92. However, there has been a robust recovery since then, with the price settling around $358 per share at the time of writing. This remarkable turnaround has resulted in year-to-date gains of 180% for Meta. Let's take a closer look to determine whether the stock is attractive to investors at the current price.
Embracing the Metaverse beyond Facebook
Meta Platforms, formerly known as Facebook, underwent a significant rebranding in October 2021. The company's original core application, Facebook, was a primary driver of user engagement, revenue and profitability. The rebranding to Meta, which hints at the concept of the "Metaverse," reflects the company's future direction. With a mission "to give people the power to build community and bring the world closer together," the social meadia giant aims to make the metaverse a reality through its diverse product offerings. The company operates through two main business segments: the Family of Apps (FoA) and Reality Labs (RL).
In 2022, the FoA segment, which includes popular apps like Facebook, Instagram, Messenger and WhatsApp, was a major revenue generator. It brought in nearly $114.5 billion, accounting for 98.2% of Meta's total revenue. This segment primarily earns through selling advertising placements to marketers. On the other hand, the RL segment, focused on virtual and augmented reality technologies, contributed significantly less, with revenue of only $2.16 billion, less than 2% of the total sales.
The FoA segment is highly profitable, generating $42.66 billion in operating income with an impressive operating margin of 37%. In contrast, the RL segment recorded $13.7 billion in losses. Meta has been leveraging the profitability of the FoA segment to support and develop the RL segment, aligning with its broader vision for the metaverse.
High growth, recent challenges and strategic revival
Over the past decade, Meta has demonstrated consistently high revenue growth. In 2012, its revenue stood at $5 billion, soaring to nearly $118 billion by 2021, before slightly declining to $116.6 billion in 2022. The annual growth rate between 2012 and 2021 varied from 21.6% to 58.4%. However, in 2022, there was a 1.1% decrease in sales, partly attributed to the appreciation of the U.S. dollar. Nonetheless, on a constant currency basis, sales growth was 4% in 2022. This slowdown in sales growth mainly resulted from a global reduction in advertising spending, influenced by a sluggish global economy and rising interest rates. Additionally, challenges arose from Apple's (AAPL, Financial) "app tracking transparency" feature, which allows users to prevent apps from tracking their activities across devices.
In 2022, Meta's operating income plummeted by 38% to nearly $29 billion. This significant drop was not only due to sluggish sales growth, but also an increase in payroll and expenses related to a 20% increase in employee headcount.
Since late 2022 and into early 2023, Meta initiated restructuring efforts to enhance its operating performance. This involved three rounds of restructuring and layoffs, particularly in recruiting and technical departments, resulting in over 20,000 job cuts. By the second quarter of 2023, Meta's workforce had been reduced to approximately 66,100 employees, a 7% decrease from the previous quarter. The 2022 restructuring led to a leaner organization and improved operating margins. Meta also leveraged artificial intelligence to boost product and business performance. AI-driven feed recommendations significantly increased user engagement, leading to a 7% rise in time spent on Facebook and a 6% increase on Instagram. Furthermore, Meta's Advantage+ Shopping Campaigns achieved a $10 billion run rate, with over 50% of advertisers utilizing the Advantage+Creative tool for ad optimization.
As a result of these restructuring efforts and initiatives, Meta's financial performance in the first three quarters of 2023 improved significantly. Revenue grew by 23% to $34.15 billion and operating profit surged by 145% to $13.75 billion. Consequently, the operating margin expanded remarkably from nearly 19.9% in the fourth quarter of 2022 to 40.36% in the third quarter of 2023.
Solid balance sheet and prudent debt management
Meta possesses a robust balance sheet, characterized by effective leverage management. As of September, the company held approximately $36.9 billion in cash and cash equivalents, along with $24.2 billion in marketable securities, including U.S. government and corporate debt instruments. Its long-term debt was relatively modest at $18.4 billion. This debt comprises fixed-rate senior unsecured notes, issued in August 2022 and May 2023, at favorable interest rates. The interest rates on these notesvaried from 3.50% to 5.75%. Furthermore, the maturity dates of these debts are spread out, ranging from 2027 to as far out as 2063. The principal payments for these debts are staggered, each ranging from $1 billion to a maximum of $3 billion.
Potential upside
Over the last 10 years, Meta has consistently increased its earnings per share, starting from a mere 1 cents in 2012, escalating to a peak of $13.77 in 2021 and then settling at $8.59 in 2022. Following its recent restructuring and the implementation of AI-driven initiatives, which have significantly improved its operating margin, the company is projected to achieve increased revenue and earnings per share in 2024. For 2024, it is estimated that Meta will generate approximately $150.7 billion in revenue and earnings of $17.39 per share. Over the last five years, Meta's price-earnings ratio has fluctuated between 8.65 and 37.90. Using the five-year average price-earnings ratio of 25.50, the estimated value of Meta's shares is around $443, which is nearly 24% higher than its current trading price.
Conclusion
Meta Platforms' financial journey is a testament to resilience and strategic foresight in a volatile market. Despite the challenges posed by global economic shifts and technological disruptions, the company's effective restructuring, particularly in 2023, and its commitment to innovation have catalyzed a significant turnaround. The company has a strong balance sheet, a focused approach to debt management and promising projections for revenue and earnings growth. The current market valuation of Meta's stock, while robust, suggests it is undervalued.
