Meta Platforms’ stock (NASDAQ: META) has lost 59% YTD, while the S&P500 is down 21% over the same period. While the technology sector stocks have declined more than the broader markets (NASDAQ 100 technology sector index down 36% YTD), Meta is facing additional challenges. Its top line witnessed a marginal drop in the second quarter due to lower advertising revenues. The advertising revenues suffered due to difficult macroeconomic conditions, which are likely to continue for some time. Further, high investment in the metaverse is also a cause of concern for investors, as it is negatively impacting the bottom line. Notably, Reality Labs (metaverse unit) reported an operating loss of $5.8 billion in the first half of 2022.
The stock is trading around $139 per share, which is 45% below its fair value of $252 – Trefis’ estimate for Meta Platforms’ valuation. Its total revenues increased 3% y-o-y to $56.7 billion in the first half of 2022, with advertising revenues improving by 2% and Reality Labs growing by 37%. However, the net income decreased 29% y-o-y to $14.2 billion, primarily due to higher payroll & related expenses and increased technical infrastructure and legal costs.
The consensus estimates for Q3 revenues are $27.5 billion. While the firm is likely to report a year-on-year decrease in revenues in the third quarter, it still has strong growth potential. The top line primarily suffered in 2022 due to the economic slowdown. Further, Meta still enjoys a strong user base, cementing its position among leading advertising platforms. In addition, the company is exploring new paid features for its family of social media apps. Overall, the revenues are likely to remain under pressure over the coming months. However, we expect it to recover with improvement in the economy.
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We expect Meta Platforms’ revenues to touch $122.8 billion (up 4% y-o-y) in FY2022. Additionally, the adjusted net income is likely to remain around $34.5 billion in the year. This coupled with an annual EPS of $12.77 and a P/E multiple of just below 20x will lead to a valuation of $252.
|S&P 500 Return||6%||-21%||69%|
|Trefis Multi-Strategy Portfolio||7%||-21%||212%|
 Month-to-date and year-to-date as of 10/6/2022
 Cumulative total returns since the end of 2016