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Why I’m Not Buying the Dip in Facebook’s Parent Meta Just Yet $FB $META

Calvin Lo

Facebook’s parent Meta Platforms (ticker FB to be changed to META) dropped >25% after releasing Q4 2021 earnings on 2nd Feb 2022, and is currently trading around $225. That’s ~40% off it’s all-time high of $384. At such a significant discount, is it a great time to buy this FAANG stock? Personally, I don’t think so or at least not just yet. Here’s why.

Apple’s privacy changes – During the conference call, Meta CFO Dave estimated that the revenue impact of Apple’s (AAPL) iOS 14 privacy changes for 2022 could be as much as $10B. This was a shocker to me, since $10B is around 8% of FB’s revenue TTM of ~$118B. That’s a huge headwind. I hope Meta is sandbagging and will be able to find alternatives to their ad targeting strategy.

Facebook users declining – Daily active users (DAUs) for the main Facebook app actually declined QoQ from 1.93B to 1.929B which although doesn’t sound like much, does confirm the trend that the main Facebook app has been losing its appeal. However, their other apps Instagram, Messenger and WhatsApp managed to pick up some slack so Family Daily Active People (DAP) still grew slightly. There is a silver lining though in Average Revenue Per User (ARPU) rising this quarter, so Meta is actually generating more revenue from each user. Meta is also still generating tons of FCF ~$12.6B in the quarter.

Big acquisitions unlikely – Meta is unlikely to be able to acquire younger and faster growing social media apps like before with Instagram and WhatsApp due to regulatory scrutiny, since that would likely be viewed as anti-competitive. Meta may not have any choice but to try to adapt to a younger audience, which they have not made much headway so far. That said, I’m not ruling out acquisition outside of social media, maybe one to accelerate their metaverse ambitions.

Fierce competition – Competitors seem to be gathering pace. Snapchat (SNAP) and Pinterest (PINS) posted impressive earnings, taking Apple’s iOS privacy changes in their stride. TikTok has been chipping away at Facebook’s market share for quite some time now, even prompting Facebook to copy them with Reels feature. Seems that Facebook is playing catch up. Unlike hardware like smartphones, switching costs for social media apps are much lower.

Metaverse cash burn – Metaverse investments not yielding results yet despite the heavy investments. It’s early days still though for their new metaverse/AR/VR division Reality Labs, but there is a lot of uncertainty on whether these heavy investments will help Facebook (or their new name Meta Platforms) really become the leader in the metaverse.

Negative sentiment – Sentiment is very negative on Facebook, both from users and from investors. In my view, FB share price crash might be justified in view of the deteriorating outlook and is unlikely to bounce back quickly so there’s no rush to jump in.

However, not all is doom and gloom. Meta CEO and founder Mark Zuckerberg has proven himself to be extremely capable of navigating the company through the many challenges over the years, and I wouldn’t bet against him in steering Meta towards the next big thing. Valuations have also dropped significantly (P/E 16x) and it seems that most of the bad news might be priced in, making FB’s risk/reward pretty attractive.

I just started scaling into FB in October 2021, so I’m glad I haven’t built a substantial position yet. FB is still only a small position in our portfolio at 1.6% after the sell-off. After some thought, I don’t think I’ll be selling or trimming my position but I’m not in a rush to load up on discounted shares either. I suspect there’s more downside in the short-term so I’ll wait for the dust to settle.

Barring any further unforeseen bad news, I might hold off any decision at least until next quarter when we get more data points specifically on DAUs, ARPU, and developments at Reality Labs. For now, I’ll try my best to sit on my hands.

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Disclosure: I’m long FB/META and AAPL

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