Meta Stock: Too Much Focus On Trends As Facebook MAU Peaks (NASDAQ:FB)

Back in the summer of 2021, I set a price target for Meta (FB) of $350. After yesterday’s earnings, the stock is trading at nearly $100 under that, and naturally, I’ve been asked whether this is a buying opportunity.

It’s been nearly six months since I’ve covered FB, so let me update my thesis on the stock with a particular focus on this quarter’s earnings report.

The Earnings Reaction

FB is usually a good short play over the Q4 (Jan/Feb) earnings report. The risk/reward favors the bears, and selloffs are common. However, FB almost always bounces back in Q1, which is its strongest quarter for a long earnings play.

That said, in the recent earnings report, I see some fundamental problems that are likely to be long-term issues for FB moving forward. Let’s go through them individually.

Reels? Get Real

Meta’s placed the blame for its dwindling earnings squarely on TikTok. Just as YouTube (GOOG) (NASDAQ:GOOGL) is doing with its YouTube Shorts, Meta is responding to the popularity of short TikTok videos with Reels. This is a major problem for Facebook.

The first reason the shift to Reels is problematic is that it shows Meta losing its lead in the market it essentially created. Facebook was previously the market leader in non-search digital advertising – and I use the world “leader” literally in that Meta was previously paving new grounds in social media use and its monetization. Now that Meta is reacting to competitors – indeed copying them – we can see that Meta no longer is leading the dance. Its previous projects were innovations leveraging the Facebook platform, but now the company has announced a focus on converting the platform to better mimic its competitors, essentially labeling itself as a follower in the industry it previously led. This reminds me a lot of Intel (INTC) during the beginning of its downfall a decade or so ago.

Second, as Meta focuses on evolving Reels to compete with TikTok, it necessarily diverts resources away from its advertising business – the business that is entirely responsible for the company’s success in the stock market. Some investors might have bought FB when the company stepped into AI or VR or any of its other speculative innovations, but as this earnings report has shown, earnings truly drive the company’s stock price. I don’t think the Reels emphasis is anything to get excited about and is likely just a time/effort/labor/money sink for the company. At the very best, an improved Reels will slow the bleed of Facebook users migrating to TikTok. I find it unlikely this project will bring palpable change to the company’s future EPS.

Third, the removal of Facebook focus – along with the name change to Meta – is essentially an admission that Facebook simply isn’t the cool social media platform it used to be. The younger demographic is gravitating toward TikTok and other platforms. Meta sees TikTok at the number one spot in the app store and desperately wants to be cool again. But as any high school student can tell you, copying what’s cool doesn’t make you cool.

What makes all of this even sadder is that Facebook has a demographic of older adults with above-average (and growing) spending power. What’s more – that demographic is a captive audience: Those adults, less willing to switch platforms due to mere trends, will likely continue using Facebook. This, plus innovations in big data as well as the statistical research driving ad targeting, should be enough to grow earnings and revenue.

But as with a lot of large companies these days, Meta isn’t satisfied with catering to a single demographic; it wants all the demographics. This is why the company is chasing trends, whether they be TikTok-style videos or virtual reality. The Metaverse is an attempt to capture all demographics, and – at least according to the history of attempts of this sort – will fail.

Peak Facebook

EPS wasn’t the only metric that sent FB stock downward. Monthly active users (MAU) dropped by 0.15%. That’s huge – not the number but the fact: This is the first time Facebook has lost users.

It might seem unreasonable for the stock to sell off on the first sign of negative growth. After all, the population is finite, and Meta should not be expected to grow forever. However, FB’s current valuation is – to a large extent – based on an expectation of growth. The company trades at over 22x price-to-earnings, 2x price-to-earnings-growth, and 7x price-to-book. These sorts of valuations can only be reasonably sustained when the company is showing continual growth in its key metric, and for a stock such as FB MAU is the metric of interest.

I’ve seen people responding to FB’s earnings numbers and stating that they are not that bad. True, but that’s not the point. The point is that FB is finally struggling to maintain growth, and that shines a spotlight on the inflated valuations of this company.

Meta Could Learn from Alphabet

I said earlier that the recent Meta reminds me of Intel. But I thought of a more fitting analogy: Alphabet.

Last decade, Google attempted to change its image. As with Meta, a name change was included (actually, Google still exists as a company under the Alphabet holding company), but the main idea was that Google wanted to step away from being just a search engine company, instead focusing on the hottest trend at the time: social media. Google’s foray into social media, with Google Plus and Google Buzz, was a flop.

Today, search advertising is still Alphabet’s main source of revenue. We no longer see Alphabet chasing trends because the company spent a decade trying and failing. I believe this is the lesson Meta is about to learn.

I am hopeful, for Meta investors, that Meta won’t take a decade to realize that Facebook should be the focus of its business. I see Reels to be much like Google Plus – an inferior rip-off version of a trending app. Meta could learn from Alphabet: Cut your losses.

I suggest you do the same.

Trade Idea

My long-term thesis for FB is rather bearish. I think the company is moving in the wrong direction by chasing trends instead of focusing on its core demographic. My short-term thesis is also bearish. Here are a couple of the analyses that led me to this.

First, as a gap trader, I recognize the gap made yesterday as a breakaway gap. After a breakaway gap of this sort, stocks tend to fall. I backtested this type of gap in FB to find it a profitable short-term short position:

Moreover, the seasonal pattern of FB in February is one that favors short positions. Here is the seasonal strategy of only holding FB over February versus buy-and-hold. Clearly, February is a month in which FB struggles to make gains, often pulling back:

With all of this in mind, I recommend the following play:

1. Sell 2x Feb11 $242.50 calls @ 8.40*
2. Buy 1x Mar4 $240 call @ 13.05*

*Prices at the time of writing

This strategy is thus opened at a net credit of 8.4*2-13.05, or $3.75. That is, you will get $375 for opening this position. The idea is to hold the position for one week, closing the short leg (if it is in the money), and opening another short leg with the next set of weekly options, repeating until the end of February. This will bring in roughly $1700 in profit per week, as long as FB falls or stays flat, which occurs occasionally after breakaway gaps.

This play unfortunately has unlimited upside risk and so is not for everyone. However, if you are holding one lot long in FB, you can be theta hedged, making this a good play for long-term FB investors. Let me know what you think in the comments section below.