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At the beginning of last year, metaplatforms (NASDAQ:META) seemed to be on an unstoppable mission to burn through as much cash as possible. As a result, Meta’s shares fell 27%.
However, with 2023 as its efficiency year, the stock price has started a recovery. So, are the shares a bargain at current prices, or is it too late for investors to buy Meta shares?
What has changed?
A year ago, Meta was facing a series of headwinds. But quite a few things have gone the company’s way since then.
First, the business has managed to reverse the trend of losing ground to TikTok. And on top of this, his rival faces doubts about his long-term future in the UK and the US.
Second, AppleMeta’s privacy changes had been predicted to cost Meta $10 billion in ad revenue. But the company’s investments in artificial intelligence could have provided a solution for the business.
Third, the company has been working on its efficiency. This has involved losing around 21,000 employees in two phases and restructuring to gain more of its remaining staff.
This all sounds like positive news, from a shareholder perspective, which explains why the stock has more than doubled from its November 2022 lows. But is it a buy?
Valuation
At today’s prices, Meta is trading at a price-earnings (P/E) ratio of 27. For context, that’s higher than Google’s parent company. Alphabet (22), but there are a couple of things to keep in mind.
First, Alphabet has its own headwinds to contend with. In particular, the competition Microsoft has cast doubt on Google’s long-term dominance.
Second, I expect Meta’s earnings to grow significantly. Analyst forecasts are for earnings per share (EPS) to be $10.22 this year, rising to $15.89 by 2026.
At today’s prices, $15.89 in EPS would be a P/E of 13. I don’t expect Meta’s stock to trade at that level, so if the company makes those gains, I think the stock will be higher.
Even after a 70% rise since the start of the year, the stock still appears to be a fair value. But I think there are still reasons for caution.
One of the big issues with Meta’s stock last year was the amount of money the company was spending on its metaverse projects. And I think that’s still a concern.
It can be argued that the metaverse segment doesn’t matter because the core platforms are worth the market cap. I think it’s a bad argument.
However, Reality Labs (which houses the company’s metaverse operations) is not something to be ignored. You are losing a lot of money.
In 2022, metaverse projects lost $13.7 billion, after losing $10.2 billion the year before. Even with the staff reductions, I don’t see that changing anytime soon.
The metaverse seems like an expensive investment. And I’m not sure it’s worth it – the metaverse seemed a lot more plausible when the pandemic lockdowns were put in place.
Risks and rewards
I am aware that not all of Meta’s capex is focused on the metaverse. But a lot of it is, and that means there’s a fair amount of uncertainty from my perspective.
At $100 a share, I thought there was enough potential to justify the risk. At $211, I think the equation is less attractive, so I will continue to look for a better opportunity.
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