Meta Meltdown

Meta Platforms, the company formerly known as Facebook, suffered the biggest one-day loss in U.S. stock market history last week. Share prices plunged 25% over night, wiping $237 billion off the company’s market cap.

That’s more than the entire value of Nike. Or McDonald’s.

Meta reported Q4 2021 earnings on February 2 and missed on revenue, issued disappointing guidance for the upcoming quarter, and revealed that Facebook’s user base declined for the first time ever.

Mark Zuckerberg and co. also expressed concern about the rise of TikTok and advertising-related headwinds from Apple’s new iOS privacy protections.

All in all, not great.

But, looking at Meta’s wild swing downward, it’s hard not to see this as one huge overreaction.

Consider: Meta also reported blistering full-year growth in revenue (37%), net income (35%), and earnings per share (36%). Add in $39 billion of free cash flow — along with $48 billion of cash on hand — and we’re not exactly talking about a financial basket case here.

While Facebook’s microscopic 0.05% decline dominated the headlines, Meta’s Family of Apps segment (which includes Facebook, Instagram, Messenger, and WhatsApp) recorded a $56.9 billion profit and average revenue per user also rose by 9%.

Honestly, there’s nothing better than seeing a blue-chip company, awash in cash and profits, suddenly drop 25% in price. Big drops are big opportunities. While others wring their hands over paper losses, smart investors swoop in and buy, buy, buy at panic-induced low prices¹.

$FB now trades at approximately 17x earnings. In an overheated, late-stage bull market like this one, that’s rare value for one of the world’s top companies².

It might sound counterintuitive, but potential investments get more attractive — not less — as the price drops. Try telling that to the financial media, though. As the stock falls, there is no shortage of negative stories and anecdotes of other investors rushing for the exit doors. Scaring people into selling low might get lots of clicks, but it destroys wealth and makes people distrustful of investing for the future.

That’s not to say that there aren’t some legit concerns about Meta.

The company’s guidance for sluggish 3-11% revenue growth in Q1 2022 likely spurred last week’s sell-off. Here are the two main reasons for that gloomy forecast:

• In April 2021, Apple released iOS 14.5 and its App Tracking Transparency feature. That’s the pop-up you see when opening a new app that asks for permission to track your data. Of course, you click no. Which dilutes Meta’s ad-tracking tools and results in much less valuable data for advertisers. In 2022, ATT will cost the company an estimated $10 billion. And, if Meta can’t come up with some new algorithm that plays nice with iOS, that number’s only gonna get bigger and bigger.

• Reels, the company’s short-form video answer to TikTok, currently monetizes at a lower rate than other options like Facebook’s News Feed or Instagram’s Stories. At least for now. Meta faced similar doubts during past transitions (like from desktop to mobile) and believes it has the playbook to turn the fast-growing Reels into a big advertising moneymaker.

And, of course, there’s the metaverse.

It’s mostly just a buzzword right now, with different companies pursuing different visions. Meta’s ‘verse seems like a Ready Player One-style virtual world, complete with digital avatars, experiences, real estate(!), and goods. Oh, and plenty of ads. That’s Meta’s bread and butter, after all.

Meta’s Reality Labs segment, tasked with crafting this new AR- and VR-based reality, racked up a stomach-churning $10.1 billion loss in 2021. Not to mention the $10 billion already lost in the two years before that. Building the metaverse is not for the faint of heart (or cash).

Oddly, the broader market seems to value this massive future investment at close to zero. To them, Meta might as well be setting a $10 billion pile of cash on fire each year.

This seems a bit short-sighted. Bloomberg Intelligence sees the metaverse as an $800 billion market in 2024, which could balloon to $1.6 trillion by 2030. If Bloomberg is right, Meta should be way out in front of this gold rush as one of the market leaders. Zuck will look like a genius.

And, even if the metaverse never takes off³, these investments into artificial intelligence, machine learning, and Oculus hardware won’t be wasted. At a minimum, any AI or ML advancements should richly pay off in more efficiently parsing customer data and creating better advertisement analytics . This isn’t some quixotic dream that Meta will abandon someday with nothing to show for its money.

Set aside these real, but solvable, problems for a second. To believe that last week’s 25% drop is in any way justified, you pretty much have to think the Meta party is over.

No more growth across the Family of Apps. No improved ad rates on Reels. No solution to Apple’s privacy initiatives. No future monetization of WhatsApp’s global reach. No artificial intelligence and machine learning advancements from heavy Reality Labs spending. No metaverse.

Whitney Tilson, value investor extraordinaire, addressed this very issue on Thursday in his daily newsletter:

It’s easy to forget amid the near-term uncertainty that Meta remains one of the greatest businesses of all time. Keep in mind that 3.6 billion people — a staggering 61% of all people aged 15 and older on the planet — use one of Meta’s services every month, up 9% year over year in the fourth quarter.

Even the ignominy of the biggest one-day drop in U.S. stock market history puts Meta in pretty good company. Of the ten largest declines since 2018, five come from Apple. Most recently two months ago. Now, $AAPL is back near all-time highs.

Microsoft and Amazon also show up on the list, as does Meta itself in July 2018. All of these companies rebounded from short-term disaster to build long-term wealth for fearless investors. In each case, market and media negativity outweighed huge cash piles and growing profits.

But, often, only for a very brief time.

1. Obligatory disclaimer: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.

2. It should also provide excellent value for Meta Platforms itself, as the company embarks on $38 billion of share repurchases in 2022.

3. I’m relatively agnostic on it.