Meta Platforms (NASDAQ:META) stock, known for its social media giants Facebook, Instagram, and WhatsApp has come under the spotlight recently.
Analysts are comparing the company’s great potential with its AI and digital advertising businesses against risks from legal issues and a rather rich valuation. The bull case shows Meta’s opportunities for future growth through AI and its large user base, while the bear case is focused on regulatory headwinds and competition threats.
Overall, I think that META is fairly valued, and therefore a hold, based on its recent earnings and revenue beat, which sent its stock on an extended rally. This article will explore the other points of view such as the bear and bull case so that investors can position their portfolios accordingly.
My position with AI is that I believe that we’re going to realize that it’s not capable of living up to the market’s expectations, but in the long run, it’s going to be highly disruptive and profitable for companies like Meta stock.
Meta’s Strong Financial Performance
According to Investing.com, more than 77% of Internet users, about 3.59 billion people, are active on at least one Meta platform. This growth corresponds with the expected increase in the size of the digital advertising industry, which is expected to grow to $1.6 trillion by 2032. Thanks to Meta’s impressive top line that swelled 22% last quarter, the company holds an impressive and growing market share, so it’s in a great position moving forward.
Then there’s the AI arms race that Meta seems to have a commanding lead in. Meta is already in the process of integrating new AI features into its apps. These remain expected to enhance the effectiveness of ads and user engagement, which may result in higher revenues in the future. Similarly, Meta’s plans in VR and the metaverse make it possible for the company to develop new income streams.
I don’t think we’ve started to see the full growth story of the metaverse just yet. Although we may not all use VR headsets to experience it, the metaverse is an emergent concept, as well as a natural consequence of spending an extended amount of our lives online and in digital worlds.
Valuation Concerns
Most analysts I talk to agree that Meta stock is a great business, but the contentious issue with this company is that there’s much disagreement on how much it should be worth per share. The firm trades at 25x earnings. This in itself is cheaper than many names in the FAANG acronym. However, analysts also predict that Meta stock’s earnings per share (EPS) will slowly drift into the single digits over the next five years. The question then is is this valuation reflective of its long-term potential in the future?
Meta stock might have only a few levers to pull to improve its earnings in the future as it reaches a point of diminishing returns with its advertising business. Pulling these levers leads to speculative results. We haven’t yet seen a widespread commercialization of AI or the metaverse just yet, but these are the hopes that the market seems to be banking on. One could argue that Meta is a sell due to the speculative risks involved in its ratios alone.
Regulatory Outlook
Meta faces substantial regulatory hurdles, particularly in Europe. The European Consumer Organisation (BEUC) and 18 affiliates filed complaints against Meta. Meanwhile, Meta stock also agreed to settle a 1.4 billion facial recognition lawsuit. As big tech becomes increasingly more powerful, I expect that these lawsuits and legal challenges will continue to pile up.
Notably, we’ve yet to see some big cases about AI in the Supreme Court. The potential of AI could suffer from the U.S. court system, especially as these technologies become increasingly more sophisticated and invasive. The issue is that a government regulating technology may give unfair disadvantages to local companies, as they need to compete with offshore firms that don’t play by the same rules.
When discounting all of Meta stock’s risks and opportunities, I feel that the firm trades fairly valued and therefore is a hold.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.