Facebook/Meta is looking attractive, this portfolio manager says

The regulatory overhang will likely persist until Meta Platforms (Meta Platforms Stock Quote, Charts, News, Analysts, Financials NASDAQ:MVRS) deals with the issues it faces on a number of levels, but the stock is looking good nonetheless, says Paul Harris of Harris Douglas Asset Management.

“[Facebook] used to be a very expensive stock but it now trades at 23x or 24x earnings and the market is at 22x,” said Harris, speaking on BNN Bloomberg on Friday. “This is a company that has EBIT margins in the 50 per cent range still, and it continues to have lots of free cash flow and a great balance sheet with no debt.”

“And they’ve got other assets that people don’t really give them [credit for] like Instagram and WhatsApp. With Instagram more so than WhatsApp, they’ve really not been able to drive their advertising business through all those areas, so I think there’s still a lot of growth in it,” he said.

Earlier this month, Facebook began trading under the new ticker MVRS, part of a rebranding the company said will better fit with its goal of becoming more than just a set of social media platforms but a full-course feast for users looking to immerse more aspects of their lives within the digital realm. 

“Our hope is that within the next decade, the metaverse will reach a billion people, host hundreds of billions of dollars of digital commerce and support jobs for millions of creators and developers,” said Meta CEO Zuckerberg in a October statement.

The company headed in that direction this week when it opened up its virtual reality app Horizon Worlds to anyone over 18 in the US and Canada. The platform launched last year as an invite-only beta for users of Facebook’s Oculus virtual reality headsets. Meta said in a press release that participants in Horizon Worlds can partake of such environments as the arcade-like Pixel Plummet, magic broom enabler Wand & Broom and Mark’s Riverboat.

“In Horizon Worlds, you’re more than just a visitor — you’re part of what makes it great,” Meta said.

Even backed by tons of cash — the company is reportedly spending $10 billion in 2021 alone on its Reality Labs — Meta’s movement into VR is but one slice of uncertainty surrounding the company, as regulators worldwide continue to debate the role its platforms are playing in society. There’s the anti-trust angle concerning how and when its Facebook platform, for example, has prevented competitors from establishing themselves. There are ongoing privacy concerns surrounding the company’s use of user data. And then there’s the growing chorus of voices portraying Facebook’s lax efforts at monitoring content posted to its platform which in some cases have led to abuse, hate speech, misinformation and other issues.

That’s a lot to digest let alone try to get ahead of as a company and stock, says Harris.

“Obviously, there are a lot of regulatory issues around Facebook, and I don’t think the company’s dealt with those things in a very good fashion. I think that’s what really hurts them more than anything else,” Harris said.

“They really have to deal with their regulatory environment and be a lot more forthright and transparent,” he said. “You’re not getting rid of Mark Zuckerberg because he owns the company through the dual share structure, but maybe you do what Google did and get somebody else to run the business and the two major shareholders can step aside.”

“I think that’s going to be very important for [Zuckerberg] and for Facebook over the next little while with how they deal with the regulatory issues. That’s the thing that will maybe keep the stock down,” Harris said.

Last year, Facebook/Meta didn’t wow investors with outsized returns during the early days of the pandemic like some of the other tech giants did but the stock still ended 2020 up 30 per cent. This year has been similar in that gains early in the year have been paired with a levelling off later on, leading to a year-to-date return of 33 per cent.

Harris says Meta has plenty of optionality when it comes to monetizing its assets, particularly on the e-commerce front.

“I do think they will continue to grow over the next little while. I think that if you are a company and you want to advertise there’s only a few places to really go digitally and Facebook is one of them. And they certainly have a much better advertising business than, say, someone like Snap or even Twitter and they’re very close to Google, so I think there’s a great opportunity there,” Harris said. 

“Whatever you think about where they’re going on Metaverse and all of those things that’s not the issue. I think in their existing businesses there’s still good growth. And you’re not paying a huge multiple for that,” he said.