Meta Platforms Stock: The Competition Is Fierce (NASDAQ:FB)

What a month February has been for Meta Platforms (FB). After reporting its earnings on February 2, the company’s stock fell 26% in a single day, then fell further over the course of the month. At one point, it looked like FB was starting to find a bottom near $217. But then Alphabet (GOOG) announced that it was considering app tracking changes similar to the Apple (AAPL) changes that cost FB so much, and its stock fell further.

As of this writing, FB stock trades for just $206. Down nearly 50% from its all-time high, it can’t seem to find a bid. Unquestionably, some kind of correction was warranted for this stock. FB estimated that Apple’s IOS changes would cost it $10 billion in 2022. That’s nearly 10% of Meta’s annual revenue. In addition, competition from companies like TikTok and Snap (SNAP) is heating up. TikTok’s website was more popular than Google in 2021, and its app frequently beat Facebook and Instagram on the App Store. TikTok targets much the same user-base instagram does (younger, image conscious people), so it is a direct competitor that is actively taking eyeballs from FB. In social media, attention is everything, so investors are right to be concerned about the competition from TikTok.

Recently, I wrote an article titled “Meta Platforms: Don’t Blame it on Apple,” which explored the impact of Apple’s tracking transparency (“ATT”) changes on FB. Basically, I concluded that while Apple’s changes negatively impacted FB’s performance last quarter, the company’s metaverse spending played a bigger role in the miss. After writing that article, I was content to leave the topic alone. I chose to stay long Meta, although I trimmed my exposure. I thought that the company could return to its previous track record of growth eventually, if it got its metaverse spending under control. So I figured a small position was still warranted after the Apple app tracking bomb.

But then, a thought occurred to me:

This is only half the equation.

Sure, Apple’s app tracking changes are a basically a surmountable challenge for Meta. If that were the only issue to address, the stock wouldn’t be all that complicated of a play at all. Meta will sooner or later get back to growth, even if ATT set it back a few years. With enough A/B testing and creative marketing, it might even be able to raise the IOS tracking opt-in rate. In May, early into ATT’s launch, the opt-in rate was 15%. A few months later, it was reported at 46%. So apps succeeded in getting users to agree to be tracked somewhat. Perhaps over time they will succeed in getting a majority back into the fold.

So there is reason for optimism on ATT. Opt in rates are rising, albeit slowly, and FB can always try out new advertising strategies. But still, there’s the matter of competition. That, in addition to ATT and the metaverse, was one of the main things FB said was holding back EPS in its fourth quarter earnings call. And it’s easily the one that FB has the least control over. Zuckerberg could end the metaverse spending overnight, and could try a variety of strategies to get ATT opt in rates up. But he can’t control the behavior of TikTok, Snapchat and others. So, the competitive threat they present is more significant than that posed by ATT.

Given this fact, it seems that some kind of post-earnings correction was warranted. It was not until Q4 that we saw the true extent of the competition Meta faces. Let’s not mince words: it’s fierce. Nevertheless, the selloff has gotten so extreme at this point that FB is now an extremely appealing value play. It probably isn’t worth the very highest prices it traded at last year, but is worth more than the levels it trades at now. In this article, I will outline why I believe that to be the case, focusing on competition, growth potential on valuation.

Competitive Landscape

Competition is, of course, the most pressing concern for Meta Platforms right now. Apple’s ATT policy may somewhat suppress revenue, but it isn’t absolutely fatal to FB’s advertising platform. Competition, however, threatens to take away eyeballs, the very foundation upon which Meta’s business is built.

So, who are Meta’s competitors right now?

In past articles, when I reviewed Meta’s competitive position, I focused on the overall competition in online advertising. Going by revenue, Meta is predominantly an online advertising business, and in this sense it is in competition with everyone from Alphabet (GOOG) to Amazon (AMZN).

However, the competition that FB called out in its Q4 earnings call was a little more specific. Here, FB was referring to competitors whose offerings are similar to FB’s own products, in addition to competing with it for ad spend. These competitors challenge not only FB’s revenue but also the relevance of its platforms. So, they are in more “direct” competition with the company than your average online advertiser is.

The three competitors causing Meta the most stress right now are:

• TikTok, a short-form video service by ByteDance.

• SnapChat, another short form video service

• Alphabet’s Youtube.

Each of these competitors is encroaching on FB’s territory in various ways.

TikTok recently overtook Facebook as the most-downloaded social media app.

Snap thwarted FB’s efforts to dominate U.S. social media by refusing to be acquired.

Youtube is a video platform, and therefore is in competition with Meta for short form video views–something Meta has been pushing heavily lately. Youtube is also a part of Alphabet, a huge company that has a larger share of the global advertising market than Meta does.

Collectively, Youtube, TikTok and Snap are competing with FB for both eyeballs and revenue. And as Alphabet’s market share and TikTok’s engagement show, they are fierce competitors. If they keep making gains on FB’s engagement, they may eventually start having a negative impact on its revenue. So, investors are right to be concerned about competition. It is a far bigger risk to Meta than ATT is.

How Will Meta Respond to the Competitive Threat?

As I showed in the previous section, Meta is facing a serious competitive threat. The logical place to turn now is the company’s response to it. Clearly, the days of Meta just gobbling up social media market share with no challenge are over. The question is how it will deal with the new competitors.

In general, it looks like FB is responding to them by creating and acquiring products similar to theirs’. And it appears to be having some success with it. Instagram Reels is a TikTok clone that launched recently, already 61% of Gen Z TikTok users are using it. WhatsApp is a recent acquisition that increased FB’s prominence in the messaging space. Live video is a feature that allows Facebook users to livestream, similar to YouTube. Together, these products and features help Meta stay ahead of the competition on features. That’s important at a time when many of those competitors are catching up with it on total engagement.

Financials

As I showed in this article, the competitive pressure Meta is facing is very real, and won’t easily be neutralized. Basically it is a clear and present danger to the company. Why, then, am I still bullish on the stock?

It has to do with financials.

In its most recent quarter, Meta managed to crank out 20% revenue growth even with ATT and rising competition in the picture. The quarter beat analyst estimates on the top line, and EPS was only off by 4%. The company did release pretty depressing sounding guidance. CFO David Wehner said that ATT would cost it $10 billion in 2022, and that first quarter revenue would only grow by 3% to 11%.

It was probably the guidance moreso than the earnings themselves that caused FB stock to fall so dramatically in the week following the release. The actual results were not that bad, but the guidance sounded pessimistic. However, FB has a history of giving conservative guidance. At the end of 2020, Dave Wehner told investors to expect deceleration due to the pandemic winding down, then revenue growth went on to accelerate in 2021. Wehner’s history of pessimistic guidance is so long that MarketWatch dubbed him the “Chicken Little of Silicon Valley.” So, it may well be that FB is just being conservative, not really expecting a terrible first quarter.

At any rate, FB’s financials are indisputably excellent. In the fourth quarter, Meta delivered $33.67 billion in revenue (up 20%), $10.28 billion in net income, and $12.85 billion in operating income. From that we get a 30% net margin and a 38% operating margin. Very solid profitability metrics. Additionally, FB has almost no long term debt. If you look at the liabilities section of the balance sheet, you’ll see that it reports only current liabilities and “other liabilities,” so there isn’t even enough long term debt to warrant a separate line item. Undoubtedly, that’s a sign of strong financial performance.

Despite having high revenue growth, high margins and next to no debt, Meta stock is still very cheap. According to Seeking Alpha Quant, it trades at the following multiples:

These are by far the lowest multiples you’ll find among the big tech giants today. For comparison, Alphabet is still trading at 23.5 times earnings, and Netflix (NFLX) is all the way up at 34 despite having gone through a crash of its own! Compared to these stocks, Meta looks like a veritable bargain. Of course, that doesn’t mean that its stock will go up. If the market is simply wrong about how it’s valuing tech stocks as a whole, then Meta could have further to fall. But Meta doesn’t just have low multiples. It also had a 35% growth rate in earnings for full year 2021. If Meta can keep up even half that growth in 2022, then it will rapidly catch up with the valuation the market is placing on it. If that happens then its stock will rise subsequently, as high-growth stocks generally don’t trade at rock-bottom multiples forever. So FB remains a great value. We may have to wait a while for it to start rising again, but rise it will, sooner or later.