meta platforms (NASDAQ:META) has fallen significantly this year, with shares down 67% year-to-date.
Despite the stock’s decline, the company still has 3.7 billion monthly users, $41.8 billion in cash and marketable securities, and substantial size.
Given the decline, it now has an expected price-to-earnings (P/E) ratio of around 14.
For a company of the quality of Meta Platforms, this rating seems rather low.
Could the stock count as a bargain?
Metaverse editions from meta platforms
Although weakness in the advertising market and slowing user growth act as headwinds, Meta Platforms’ Metaverse editions are arguably the main reason for the stock’s poor performance.
The Metaverse is a virtual reality world that optimists hope will be the next version of the internet.
The company has already spent $15 billion on the Metaverse since early 2021 and plans to spend even more over an extended period.
While other companies invest a modest amount of capital to bring a promising product to market when there is sufficient demand, they spend a significant amount of capital without showing any sign of consumer demand at all.
The enormous Metaverse expenditures have not shown any results so far.
The company’s Metaverse product, Horizon Worlds, has fewer than 200,000 monthly active users, which is below the company’s original goal of 500,000 monthly active users.
Many Horizon Worlds users don’t stay very long as they don’t return after the first month.
Reality Labs’ operating losses are also expected to be significantly larger in 2023 than they are this year.
Reality Labs is the division of Meta Platforms that manufactures its Metaverse virtual and artificial reality hardware and software products.
The biggest concern is that because of its Metaverse investments, Meta Platforms won’t focus enough on its core social media business, causing earnings per share to fall further.
While Meta Platforms’ net income has been hit hard this year, here are ways the business could improve over the long term.
#1: A realistic and compelling metaverse
First, Meta Platforms’ Metaverse product could improve enough for the market to eventually buy it.
Although the existing iteration of Meta Platform’s metaverse, Horizon Worlds, doesn’t have good graphics, the future product still has a lot of potential as there are video games that are already quite realistic.
With the popularity of Massive Multiplayer Online Role-Playing Games (MMORPG), there are also many people who want to spend time in a virtual world.
If it keeps up its spending, it may be a matter of time before the company creates something compelling for users and investors.
#2: Other platforms are successful
Second, CEO Mark Zuckerberg has reiterated that the company will be spending money on three other major platforms alongside the Metaverse — a consumer virtual reality product, augmented reality, and neural interfaces.
There is potential for all of them to be successful and generate high market demand even if the Metaverse does not.
#3: Meta platforms spend less on the metaverse
Another potential way for meta platforms to improve their revenue is to not spend as much on the metaverse.
Meta Platforms’ core business generates significant free cash flow.
For 2021, the company generated $39.1 billion in free cash flow, even though Meta Platforms had already invested billions of dollars in the Metaverse this year.
If Zuckerberg focuses on the company’s core business and decides not to invest in the Metaverse, I believe the company could generate $25 billion to $40 billion in free cash flow, as it has in recent history.
If the stock traded at 15 times free cash flow of $25 billion, the stock would have an enterprise value of $375 billion versus the company’s current enterprise value of $281.2 billion.
This simple back-of-the-envelope calculation suggests that Meta Platforms’ stock price still has some upside potential should the company scale back its Metaverse spending.
#4 roles bring more sales
A fourth way for Meta Platforms to reverse the trend is to improve its Reels product and allow the company to maintain its user base and strong engagement over the long term.
Last year, Meta Platforms’ Reels generated $3 billion in revenue across the Meta Platforms family of apps.
Since the company hasn’t monetized Reels that well, the product is considered to be in its infancy.
However, over the next 18 months, Reels could gain momentum and achieve a higher turnover rate, which would eventually add value to the group’s overall sales.
While competitor TikTok has grown, Meta Platforms user numbers show that the company is still doing well despite the competition.
In the third quarter, the company’s total monthly active users grew 4% year over year to 3.7 billion.
If the company maintains its user base, continues its strong engagement, and increases monetization of Reels, Meta Platforms’ revenues could grow over the long term.
#5 by Meta Platforms artificial intelligence division
Metaplatforms could benefit from the successful use of artificial intelligence (AI).
In the third quarter of this year, much of the increase in the company’s capital expenditures was due to the expansion of its AI infrastructure.
With better AI, the company could potentially display better, more targeted advertising, which will help its Reels product be better monetized in the future.
Conclusion
Meta Platforms stock is down significantly this year due to significant Metaverse spending, which currently doesn’t show much potential.
Still, the company has several opportunities to increase earnings and share price over the long term.
However, investors need to be patient as these methods take time to show results.
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Disclosure: Jay Yao does not own any stock of Meta Platforms.
