Following up on the post that i have done early this morning (Meta Platform – Multi-year sales ongoing). Since then, I have read many articles commenting on the company, questioning the future of the Meta Platforms and stuff like that. After all, Facebook’s $237.6 billion fall sets record for largest one-day value drop in stock market history. Jim Cramer from CNBC said he expected Facebook parent Meta shares to fall further and told investors not to buy the dip just yet. But when I dig deeper, I realised that they are not alone. Some of the big tech names have experienced such meltdown on their company’s share prices as well (Refer to table below). Interestingly, these companies who had the same experience in the past are renowned tech names like Apple, Microsoft, Tesla and Amazon. These companies are still doing well today (hint hint).
To set the record straight, I am not a fan of Facebook coming into the crash (I don’t own any shares of it prior to the share price plummeting). I prefer tech names like alphabet, Apple, Microsoft, IBM, Amazon and Intel. Facebook has been very transparent though, and they had indicated some of their business risks in their IPO prospectus many years ago and one of them was their dependence on third-party platforms (Android, IOS) for product distribution. We see this manifesting in the latest results. Apple’s privacy changes negatively impacted Facebook’s advertising business in the last quarter. Apple’s App Tracking Transparency (ATT) rules have made it difficult for Facebook to measure the success of some of ad campaigns, resulting in delayed or restricted data.
On Wednesday after market closed, the company issued disappointing guidance for the first quarter 2022 in addition to coming up short on its fourth-quarter profit and user numbers. Daily Active Users (DAUs) on Facebook were slightly down in the fourth quarter compared to the previous quarter, marking its first quarterly decline in DAUs on record. Market consensus have started to forecast a 10% drop in Meta’s 2022 earnings per share (EPS).
With a 25% drop in the share price, I am curious to find out if this is an opportunity for me, from a value perspective to buy into the shares (Note: I am not a Facebook bull and I am still skeptical about their growth potential going forward). In another words, is the price of facebook low enough to entice me to take a position?
After the recent crash of its share price, current PE stands at 17.23x (Refer to chart above). So based on historical earnings perspective, the share price does look cheap. But to be safer, I would like to factor in the anticipated drop in earnings for FY2022 and its challenging competitive landscape.
Since market consensus are starting to apply a 10% discount to earnings for the year 2022, I am just going to do just that. Based on a 2021 EPS of US$13.80, applying a 10% discount, EPS for 2022 is forecasted to be c. US$12.42.
We see that the average PE for the company is 29.64x, but I am not going to take that number wholesale in view of the uncertainties surrounding the company’s future (both the knowns and the unknowns). To be conservative, I will be using the lower end of the PE band for the past 3 years, which is about 21.5x (discounted).
With the above parameters, I arrived at a price of US$267.03. This price has accounted for a 10% decline in revenue for 2022 and the challenging competitive landscape that the company is facing now.
Last traded price of Meta was US$237.76. As such, we see a potential mispricing of 12.31% from the fair value of US$267.03. Laymanly, it means that conservatively, the share price should be trading at US$267.03 even with the negative outlook for 2022 financial numbers and macro-environment headwinds.
To be transparent, I did buy into Meta this morning at US$237.97 so that you will know. From a value perspective, it does look enticing to me and from a risk-reward perspective, the risk looks pretty manageable in view of the steep discounts on the share price.
DO TAKE NOTE THAT THIS ARTICLE DOES NOT CONSTITUTE FINANCIAL ADVICE AND PLEASE CONSULT YOUR FINANCIAL/INVESTMENT ADVISOR TO BETTER UNDERSTAND YOUR INVESTMENT NEEDS. THIS IS ALSO NOT A SOLICITATION TO BUY SECURITIES MENTIONED IN THE ARTICLE. AS OF WRITING, I DO OWN SHARES IN META PLATFORMS AND AS SUCH< MY VIEWS MAY BE BIASED. PLEASE READ DISCLAIMER BELOW.
Link to previous post here: https://alphaedgeinvesting.com/2022/02/03/meta-platform-multi-year-sales-ongoing/