Shares of Facebook’s parent company, Meta Platforms (NASDAQ: FB), are down over 20% in extended trading after the company reported disappointing earnings. I think that the sell-off in Meta shares might mean that it is time for me to buy Facebook.
Meta Platforms now consists of two segments. The first is the family of apps segment, which includes apps such as Facebook, Instagram, Messenger, and WhatsApp. The second is the reality labs segment, which is involved with hardware, software, and content for augmented and virtual reality.
Poor quarterly performance
Neither segment performed well in Q4 2021. The family of apps segment reported a decline in daily and monthly active users on Facebook. The reality labs segment posted an operating loss of $3.3bn. Overall, Meta Platforms missed analyst expectations on revenues, earnings per share, and guidance for Q1 2022. In sharp contrast to Alphabet, whose shares rose 8% after a strong earnings report on Tuesday, Meta shares fell over 20% in extended trading following its earnings report. While it’s impossible to say how low Meta shares might go in the short term, I think that the reaction to the earnings call means the stock might be a buy for my portfolio.
The sell-off of Meta shares in extended trading reduces the company’s market cap to around $700bn. The company’s balance sheet at the end of 2021 revealed just under $14bn in total debt and around $16.6bn in cash. Free cash flow for 2021 came in around $38.5bn, implying a return of around 5.5% from an investment perspective.
Buying opportunity
I view this is attractive and think that the reaction to the earnings call creates a buying opportunity. The future success of reality labs is difficult to predict, but I think the family of apps segment by itself, which produced just under $57bn in operating income in 2021, justifies the current market cap. I also think that the disappointing decline in active users on Facebook is somewhat offset by the increase in daily active people across its other platforms in the family segment, as well as the increase in average revenue per person across the family of apps platforms.
Meta’s financial position is, in my view, extremely strong. The company’s $66.6bn in current assets more than cover its total liabilities of around $41bn, meaning that the company could erase its debts in a hurry. The company is also repurchasing shares and has authorisation to spend up to $38.79bn on further share buybacks. A lower market cap allows Meta to buy back more of the company, increasing the value of its repurchasing scheme.
The biggest threat to Meta’s position that I can see comes from the lingering threat of antitrust action. Regulatory scrutiny has dampened the company’s earnings before in 2019 and concerns about how the family of apps businesses handle user data present a significant risk. But I think that the sharp decline in Meta’s share price means that investors have already priced in this risk. I’ll be thinking seriously about adding Meta shares to my portfolio in the next few days.
