Frustration is a reasonable response to Meta Platforms‘ (META -6.09%) aggressive spending on its metaverse ambitions. After all, at the very least, the economy is softening, and things could get worse. The logical move would be to cut back on your spending, especially when Meta’s Reality Labs segment is bleeding cash. However, Meta isn’t letting up.
Wall Street disapproves of Meta’s actions, and has slaughtered the stock price over the past 12 months. But CEO Mark Zuckerberg believes that Reality Labs is critical to the company’s future, so investors holding the stock should probably come to terms with that.
But the market can get carried away. Here is why Meta could be a great buy today, even with its ongoing problems.
There is a lot of negativity around Meta Platforms
Despite being a component of the FAANG acronym of Wall Street’s most prominent technology stocks, investors are arguably more bearish on Meta Platforms than ever. To be fair, there is a lot of baggage right now.
A bear market like what Wall Street sees today is not a good situation for a company with problems, and the stock’s responded by falling to its lowest price since 2015, when the company made $17.9 billion in revenue. Meta’s done about $118 billion over the past four quarters, a ten-fold difference. Investors are treating Meta like its sky is falling.
But that’s all priced in, and then some
There is no denying Meta’s losses on Reality Labs, which were $3.7 billion just in the third quarter of this year. Further, Meta is still navigating the iOS privacy changes Apple implemented. But should the market sell Meta down to almost nothing? Or is there a point where the stock price reflects all these problems?
You can value a stock by looking at how much of a company’s free cash flow you’re getting for your investment. Free cash flow is cash profit the company can spend on dividends or share repurchases, or stack on its balance sheet. A high free cash flow yield means that not only is the company doing well enough to generate cash profits, but the stock is also trading low enough that you’re getting more bang for your buck when you buy shares.
Below is Meta’s free cash flow yield over time. You can see that the current yield approaching 10% is its highest in many years. Remember that free cash flow is discretionary cash profits, so that’s after the Reality Labs spending. Free cash flow would be even higher if not for Reality Labs, but the point is that Wall Street has way oversold the stock relative to the actual financial state of Meta’s business.
This data is only a snapshot, and Meta’s financials could worsen over time. That’s a risk you take in investing.
But if you’re looking for a margin of safety, here it is. Meta’s stock has become so cheap that the business would have to get a lot worse than it is now for its valuation even to approach where it’s historically traded.
A long-term investor can do very well if Meta reverts toward its past valuation, and that’s before factoring in any potential success from Reality Labs. Zuckerberg’s metaverse ambitions could send Meta to a new level if he eventually proves Wall Street wrong.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Meta Platforms, Inc. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.