The price of Meta Platforms (NASDAQ:FB) shares has fallen sharply from $323 to around $220. I’ve used this decline to add Meta Platforms stock to my portfolio.
The catalyst for the sharp decline was the earnings report the company posted on Wednesday evening. Investors appear to have been disappointed by the number of daily active users (DAUs) on Facebook and the weak forecast for revenue growth. I don’t think that either result is particularly alarming.
Declining DAUs
The number of DAUs on Facebook fell from 1,930m to 1,929m during Q4 2021. That’s not good, but looking at this result in a broader context gives me three reasons for optimism.
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First, the decline in DAUs was somewhat uneven. While the number of DAUs declined in the US & Canada and Rest of World segments, it increased in Europe and Asia-Pacific. That indicates to me that there might still be room for growth in Facebook’s DAUs in certain areas.
Second, while the number of daily active users on Facebook decreased, the number of Daily Active People on Meta’s ‘Family of Apps’ segment (which includes Facebook, Instagram, and WhatsApp) actually increased from 2.81bn to 2.82bn. I think that this means that a decline in Facebook users might be offset by growth in users on other platforms.
Third, Facebook’s disappointing DAUs was compensated for by the business doing a more efficient job of monetising its users. Average Revenue per User (ARPU) increased in every region during the last quarter, meaning that overall revenues were higher. Overall, I take the view that having a broader perspective on the decline in users brings me to think that the decrease in DAUs doesn’t justify the share price drop.
Guidance
Meta Platforms forecasted revenue growth of between 3% and 11% for the first quarter of 2022. With a share price at $323, I accept that this looks disappointing. But with a share price having fallen to $220, I don’t have a problem.
The concern is that the company might not grow as fast in the future as it has done in the past. The company’s guidance indicates that it might be transitioning from a fast-growing company to a mature growth stock. But if we take the midpoint of the guidance given by management and assume that 7% is the new normal for the company’s revenue, then I believe that Meta Platforms stock is still a bargain.
At current prices, I estimate that Meta Platforms stock offers a business return of 6.6%. If revenues increase at 7% annually, I expect margins to expand and free cash flows to increase at around 8%. A 6.6% starting return that grows at 8% annually provides a return of 9.57% on average over the next decade. In my view, this is attractive enough for me to justify buying shares for my portfolio.
To my mind, nothing in the earnings call amounted to a serious cause for alarm. I think that the biggest investment risk going forward is the company’s commitment to the metaverse. The segment of the business focused on the metaverse lost $3.3bn in the last quarter. I’m watching my investment carefully to make sure that this doesn’t ultimately create too much a drag on my returns. But for now, I think that the sell-off in Meta Platforms stock is unjustified and I’ve been buying shares in the company.
