We are adding more shares of Meta (Facebook) to the portfolio to take advantage of great valuations. We believe the market has oversold this stock and the current valuations are very attractive for a long-term owner.
We believe that Meta is still a growth company (even if it has slower growth than the average), priced like a stagnant, mature company. Its stock has fallen 42% this year, driven by a more significant sell-off in NASDAQ, macroeconomic challenges affecting the overall economy, and the slowing rates of user monetization on the company’s products directly, some of which can be attributed to changes in Apple’s privacy policies.
However, we believe that all the bad news has been factored in at these valuations, and investors are discounting the large, and still growing earnings engines that Meta has in the Facebook platform, Instagram, WhatsApp, and more. Active users are still growing on Meta’s platforms as they saw daily active people increase from 2.82B last quarter to 2.87B this quarter, a roughly 50M increase in active users. Also, talking about an earnings engine, Meta generates a lot of free cash flow relative to its current valuation. And even after deducting the cash, they are investing in capital expenditures and new developments.
The company faces a lot of short-term headwinds and some long-term risks. Advertising has gone down a lot, and Meta’s revenue from ads per user declined 8%. With COVID easing and macroeconomic pressures on all sides, the projected ad spend looks very poor. There are also some initiatives the company is investing lots of its time and money in, like AI, augmented reality, and their business platforms which may not all work out.
However, we believe these have been priced in and that Meta’s core products will deliver much growth, which the market seems not to appreciate. And that is why we are buying more shares of Meta for the portfolio.