Meta isn't the value stock everyone thinks it is

Is Meta Platforms (US:META) a ‘value’ stock? That seems to be the new consensus among financial commentators (and in some quarters of the IC itself), as the Facebook-owner limps into a new year, having just laid off one in eight employees and seen its share price tank 60 per cent in 12 months.

One only need look at the company’s market valuation to understand why. This year, Wall Street expects the former $1tn (£820bn) company to generate earnings of $8.11 per share, down from September 2021’s high water mark 2023 forecast of $18.90. That puts the stock on a forward earnings multiple of 16, or roughly half its five-year high.

Although broker estimates are for earnings to recover in 2024 and 2025, investors aren’t buying it. The murky outlook for near-term profits has bled into the market’s assessment of Meta’s balance sheet value: at $131, the stock is priced at 2.8 times the company’s net assets, or half the five-year average. Strip cash from Meta’s $345bn market capitalisation and the business is valued at six times cash profits, or a fifth below the aggregate for that erstwhile knacker’s yard of value stocks, the FTSE 100.

The core online advertising market has certainly soured, but there is a much bigger reason for the collapse in margins, returns on capital and investor sentiment. At the end of 2021, Meta announced it was all-in on the metaverse: an immersive but ill-defined online virtual world that the social media group believes will be the next iteration of the internet.

It’s proving very expensive. In the first nine months of 2022, revenue from Reality Labs – the division incubating the push – edged up from $1.40bn to $1.43bn. Massive R&D outlays meant operating losses jumped from $6.9bn to $9.4bn and are expected to “grow significantly” in 2023 (FactSet-compiled consensus forecasts are for a loss of $16.9bn, expanding to $18.5bn in 2024).

In what feels like the blink of an eye, Meta’s trajectory has veered from rocketing sales and strong operating leverage to single-digit top-line growth and ballooning overheads. The best investors can now hope for, per chief financial officer Susan Li, is “growing overall company operating income in the long run”.

This, then, isn’t your classic ‘value’ play. For a start, chief executive Mark Zuckerberg has bet the farm on a technology he expects will grow exponentially. Others, not least tech peers Microsoft (US:MSFT) and Nvidia (US:NVDA), agree. We may lack a definition of what constitutes the ‘metaverse market’, but various pinch-of-salt-requiring projections are for it to grow 40 per cent a year this decade. The MBAs at McKinsey divine “up to $5tn in value by 2030”.

Nor is the rump business typical of most value stocks, which are forced to eke out efficiencies to just about improve on broader economy-wide growth rates. Consensus forecasts for the Family of Apps division (home to Facebook, Instagram, WhatsApp and Messenger) are still for average sales growth of 9 per cent a year until 2027, and oodles of operating cash flow for investments elsewhere.

If Meta is a ‘value’ stock, its value is not so much trapped as unproven. The naysayers doubt it will ever be realised, or that the path to McKinsey’s “$5tn of value” is too obscure, or long for a sensible appraisal of the time value of an investment today. Until that obscurity lifts, Meta can’t be a contrarian stock, either. Investing in new technology-enabled markets may run contrary to prevailing risk sentiment, but you can’t be contrary about an idea before it reaches the proof-of-concept stage.

A better description is that Meta is now a thematic stock, in the style of those exchange-traded funds (ETFs) that offer exposure to growth industries, long-term trends or one-off economic shifts.

BlackRock, a big hawker of thematic ETFs, argues the products remove the “pressure of trying to pick single-stock winners”. But if you believe the metaverse is where commerce will soon happen, then what better “pure-play” is there than a company that has staked its entire business model and future free cash flow on its widespread adoption. If things don’t pan out, then the profitability of Meta’s legacy business might still offer the kind of downside protection that value investors look for.