For years, Mark Zuckerberg was one of the most ridiculed CEOs in big tech, promoting augmented reality (AR) glasses, virtual offices and a metaverse that no one asked for. Then the billionaire entrepreneur turned to artificial intelligence (AI), Metaplatforms (META +0.22%) The stock price tripled and Wall Street crowned him a capital allocation expert.
Now that Meta has become the most attractively valued stock in the ‘Magnificent Seven’ based on future profit forecasts, investors have soured again. The irony is poetic. Let’s unpack why the reflexive fears surrounding Meta are almost certainly wrong.
Data per YCharts.
The real reason why sentiment on Meta stock changed
Investors are not turning away from Meta because its business is deteriorating. Rather, the panic selling is a consequence of Meta’s aggressive capex ambitions in a potentially recessionary macro environment. When the Federal Reserve appears uncertain about the direction of monetary policy as consumer confidence falls, a company announcing $135 billion in infrastructure commitments becomes an easy target.
In these scenarios, the market often revalues first and asks questions later. Meta went from visionary to reckless in a single earnings cycle – not because the underlying profitability of the company changed, but because the risk tolerance around it changed.
There is also a more subtle problem at play. Meta’s advertising business is closely tied to small and medium-sized businesses (SMEs) – a segment highly vulnerable to consumer downturns. When economic uncertainty increases, the SMB cohort is typically the first to rein in digital ad spending before large enterprises do.
Smart investors understand this relationship and are now considering a scenario where Meta’s revenue growth stagnates while its cost base increases.
Image source: Getty Images.
The discount is an opportunity, not a warning sign
The sell-off in Meta stock (down as much as 20% year-over-year at the end of March) shows how the market is combining two different risks: the possibility of advertising softness in the short term and the opportunity cost of capital misallocation in the long term. These factors are independent of each other, but Meta’s current valuation treats them as if they were two sides of the same coin.
Meta’s price-to-earnings ratio, which is below that of all other members of the Magnificent Seven, suggests that the market believes Meta’s earnings power is vulnerable and poised to underperform the big tech companies for an extended period. This argument is difficult to support given Meta’s competitive position. No other platform offers what Meta has built: three separate ecosystems with 1 billion or more regular users – Facebook, Instagram and WhatsApp – powered by a single AI inference layer.
The company’s advertising system doesn’t just run marketing campaigns and targeted ads. Meta’s ecosystem is a complete trading network that completes transactions on a global scale. The company’s progress with AI-powered advertising through Advantage+ shows that Meta’s advantage is still in its infancy, yet the market is pricing the stock as if the company is maturing and hitting a plateau.
Today’s change
(0.22%)$1.36
Current price
$629.75
Key data points
Market capitalization
$1.6 tons
Day range
$624.37 -$638.55
Range of 52 weeks
$479.80 -$796.25
Volume
1.1 million
Avg. full
16M
Gross margin
82:00%
Dividend yield
0.33%
Buy Meta stock now, not later
The argument for waiting to buy Meta stock is tempting: let the macro picture be clear, let the ad spend numbers show up in the financials, and then buy the shares. However, this logic ignores how reassessments actually work. Meta won’t trade at a discount once the fear passes because the stock will have already catapulted.
Investors waiting for clarity on Meta in 2023 ended up paying more for the same company they could have bought when the world was convinced Zuckerberg had lost the plot during his short-lived Metaverse obsession.
Meta stocks are the cheapest among the big tech companies for emotional reasons, not for fundamental reasons. The fear-driven sell-off is the real entry point.
Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, and is short shares of Apple. The Motley Fool has a disclosure policy.
