Last week, my wife went on a buying spree of US mega-cap stocks. Within minutes, we owned shares in six huge American corporations. But here’s why we opted not to buy Meta Platforms (NASDAQ: META) stock.
Meta stocks slumps, then soars
Last Friday, I noticed that Meta had slumped to fresh 2022 lows. It crashed as low as $88.09, before closing at $90.79. At its 52-week high on 22 November 2021, the stock touched $353.80.
This stock has performed dreadfully since the tech bubble started bursting. Here are its returns over seven periods, based on the current price of $107.08:
Despite a robust rebound since last Friday, the stock has collapsed almost seven-tenths over 12 months. In addition, it has declined by nearly two-fifths in the last half-decade.
Meta looks dirt-cheap to me today
I could be gutted that we chose not to buy last Friday. After all, we’d be sitting on a paper gain of more than a fifth in a few days. But even after this bounce-back, Meta — once a trillion-dollar business — is valued at ‘just’ $285.3bn today.
Right now, the shares trade on a price-to-earnings ratio of just 10.2. This translates into an earnings yield of almost 9.8% a year — highly attractive among US tech stocks. However, it doesn’t pay any dividends, making its cash yield zero (not something I’d usually like).
Why I won’t buy
For years, Meta — formerly Facebook — was a hugely successful, high-growth business. Under founder Mark Zuckerberg (‘Zuck’), customers, revenues and earnings all soared.
However, in the words of my teenage daughter: “Only grandparents use Facebook now.” Yet I know from my extended contacts that this isn’t strictly true. Also, Meta operates other leading online brands, including Instagram and Whatsapp. These remain highly popular across multiple age bands. So things don’t look bleak just yet.
Over the past year, Meta’s revenues have risen by around $6bn (5.4%). But its cost base has blown out spectacularly, with research & development costs soaring by $10bn year on year. As a result of this (and increased sales & marketing spending), Meta’s earnings per share have crumbled from $13.78 to $10.49. That’s a plunge of 23.9%.
Meta got Zucked
For me, the problem is that Zuck has bet the future of Meta on the so-called metaverse: an immersive, virtual-reality world. Thus, the group is pouring huge sums into gaining first-mover advantage in this new tech frontier. And there’s little shareholders can do about this gargantuan gamble.
Though he owns just 13% of Meta shares, he controls 55% of the company’s votes, by virtue of the fact that he owns special super-voting shares. Hence, as controlling shareholder, he can tell investors — both private and institutional — “back me or back out”.
I repeat: I regard Meta stock as among the cheapest shares in the entire S&P 500 index. But I think Zuck has made a super-scary bet on the firm’s future direction. I struggle to understand how conquering the metaverse will translate into bumper future earnings for Meta shareholders. And I’ve been using computers (and writing code) since the mid-1970s, so I’m no technophobe. I could be wrong, but Meta isn’t a tech stock for me right now!
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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.