Shares in Meta Platforms (NASDAQ:META) are down by 58% since the start of the year. I own Meta stock in my portfolio, so should I be buying more at these lower prices?
At first sight, the investment proposition looks very attractive. Meta is a highly profitable business with a strong balance sheet and it trades at a price-to-earnings (P/E) ratio of just over 11.
Fair enough, so why has the stock been falling? One answer is that the stock market in general has been coming down as interest rates rise to combat inflation.
But Meta has fallen more than most of its peers. The S&P 500 is only down 21% since the beginning of January.
As I see it, the biggest issue concerning investors at the moment is the possibility of Apple disrupting Meta’s business. I think this is a legitimate concern, but I’m still happy to buy the stock.
Apple
Meta makes its money by selling advertising space. One of its main selling points is that it is able to target specific adverts to audiences that might be receptive to them.
Apple has made recent moves to stop companies collecting user data, which is what makes targeted advertising possible. This threatens Meta’s core offering. If it can’t target its advertising, it becomes less attractive.
There are two things that I’d note here. First, Apple only accounts for about 23% of the global smartphone market, meaning that its effect on Meta’s business is likely to be limited.
Second, even if Meta is less efficient in targeting users, it still has a lot of users on its platforms. I think that this, by itself, means that the company will continue to be attractive to advertisers.
According to its last report, Meta has 2.88bn daily active users across all of its platforms. That’s significantly higher than any of its competitors.
It’s probably fair to say that the number of users is unlikely to grow at the rates it once did. But I think that the company has reached a size where it’s attractive enough as it is.
Valuation
In addition to pressure from Apple, there are some other headwinds for the company to contend with. Most obviously, Meta is currently investing significant cash into its metaverse operations.
This might well weigh on the company’s overall profitability. But I think that slowing growth is already priced into the stock at current levels.
I think that the business is currently priced for a 6.7% annual return. From there, I don’t think that it needs to grow much to be a viable investment proposition for me.
If the company can grow its free cash at 4% annually for the next decade, that’s an average annual return of 8%. Even with the current headwinds, I think that’s achievable.
That’s why I own Meta shares in my portfolio. And it’s why I’d be happy buying more at today’s prices.
