Meta (NASDAQ: FB) stock has suffered considerably over the past month, crashing nearly 40% to $200. This means that the company’s market cap has fallen back to around $500bn. Such a large fall has been caused by disappointing growth prospects. Even so, this dip has left Meta looking very cheap to me on a valuation basis. Therefore, can the Facebook owner outperform the S&P 500 over the next few years?
What caused the large decline?
There is no doubt that the recent Q4 trading update from the company was a disaster. In fact, for the first time in its history, daily active users dropped slightly to 1.929bn. This was partly due to the rise of TikTok, which has been attracting many younger users. This also led to disappointing forward guidance, whereby Q1 revenues are only expected to increase 7% year-on-year.
There are also issues due to operating changes by Apple, which allows iPhone users to tell app makers not to track them around the internet. This was introduced in June 2020, and it has been revealed that it will likely cost Meta around $10bn in revenues this year. These are big numbers, and due to the recent issues with the company, its impact seems particularly profound right now. As such, there is a risk that Meta stock will continue to fall due to the weaker growth prospects.
Is Meta stock now too cheap?
The recent dip may have made it an ideal time to buy though. For example, the stock currently trades at a price-to-earnings ratio of around 15. This is similar to the valuation of many utilities’ companies, which are seeing far slower, or even negative growth. Further, the company has a very large share buyback programme, which was under way even before its disastrous results in February. These repurchases were completed at prices of around $300, demonstrating that the company believed the stock was too cheap at these levels. Therefore, I believe that the stock buyback programme will continue at a fast pace throughout 2022, and this should have a positive effect on the Meta share price.
There is also a hope that Meta will play a major role in the metaverse in the future. Indeed, it’s currently investing a lot of money into development in this area, with the hope that future profits can grow at extraordinary rates. Of course, there are several risks with the tactic, especially as the metaverse may not be as big as the company hopes. Even so, it’s still promising to see a new dimension to the company.
Can the company outperform the S&P 500?
It’s clear that Meta stock is trading at historically low valuations. In comparison to other S&P 500 stocks, it also seems ridiculously cheap. For example, Apple trades at a P/E ratio of around 30, Amazon at over 50 and Nike at over 30. Meta’s growth prospects are not too dissimilar to these companies. Further, McDonald’s,which is seeing slower growth than Meta, has a P/E ratio of 25. This makes me think that Meta is far too cheap right now and will hopefully be able to outperform the S&P 500. I may add some Meta shares to my portfolio.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Stuart Blair owns shares in Apple. The Motley Fool UK has recommended Amazon, Apple, and Nike. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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