Meta Platforms is risky but attractive, this investor says

High-growth tech stocks have always been at the riskier end of the investing spectrum and while the current climate clearly has lost interest in taking that risk, there’s always that Warren Buffett phrase ringing in the air about being greedy when others are fearful. And that may in fact turn out to be the case with Meta Platforms (Meta Platforms Stock Quote, Charts, News, Analysts, Financials NASDAQ:FB), which is currently down in the dumps as a stock. And even with the headwinds it faces on the growth front, portfolio manager John Zechner thinks the company’s fundamentals and its growth prospects make FB worth the risk. 

“We own it and I’d love to buy more in here. We’ve been a buyer of it recently because the valuation just sticks out as so cheap,” said Zechner, chairman of J. Zechner Associates, who spoke on BNN Bloomberg on Tuesday.

“Clearly the big risk in the short term is how much the change in the protocols on the Apple devices on the iOS has affected the router ability for online advertising,” Zechner said. “When Facebook went public they basically had zero advertising on mobile devices and that’s what really drove the growth in the stock over the past eight to ten years. And now that’s being challenged because obviously Apple has removed some of [Facebook’s] ability to follow consumers all over the place in terms of their search activity and you help advertise in that way.”

“So the big question is, will that impact their mobile advertising going forward and to the degree it does that’s why the stock was down so much. [But] I think you’ve factored that in,” he said.

Fans of Meta Platforms, which reports its first quarter 2022 earnings on Wednesday after market close, are hoping for good news (or in the very least not bad news) on the company’s business, which has been saddled with a number of challenges, from prevailing regulatory and privacy concerns to dwindling user growth and rising competition from the likes of TikTok to its “all-in” metaverse gamble as well as the aforementioned dagger from Apple, one that Facebook itself says could cost the company upwards of $10 billion in sales this year alone.

Last year, Apple put in privacy changes to its iOS operating system that runs the iPhone. Known as its App Tracking Transparency feature, iPhone users are prompted with a permission popup before opening an app, asking whether users will allow apps like Facebook to track user activity across websites. That information is gold to advertisers and without it, Facebook’s ability to sell ads is diminished.

“We believe the impact of iOS overall is a headwind on our business in 2022,” said Meta CFO Dave Wehner in the company’s fourth quarter conference call in February. “It’s on the order of $10 billion, so it’s a pretty significant headwind for our business.”

The company is still seeing revenue growth at an impressive rate, with last year’s topline at $117.9 billion representing a 37 per cent improvement over 2020’s numbers, while profit has been strong at $39.370 billion for 2021 versus $29.146 billion in 2020. (All figures in US dollars.)

Meta’s user base has also been growing, albeit at a slower pace, with its monthly active people (MAP) marker hitting 3.59 billion by the end of December 2021, representing a year-over-year uptick of seven per cent. Meta’s daily active user (DAU) count, however, was lower sequentially over the Q4, and analysts had been expecting 2.95 billion monthly active users (MAUs) by the end of that quarter versus the realized 2.91 billion.

The outlook from its Q4 report was also gloomy, with Wehner saying in a press release they expect headwinds “from both increased competition for people’s time and a shift of engagement within our apps towards video surfaces like Reels, which monetize at lower rates than Feed and Stories.”

The impact on Meta’s share price couldn’t be more glaring. The stock has lost over half of its value since last September, which even taking into consideration the general market rotation away from tech is a huge loss.

But Zechner sees the drop in tech and in Meta in particular as an opportunity for the intrepid investor.

“Between Alphabet and Facebook/Meta they own [the online advertising] market. And so, are they both impacted [by Apple’s ATT feature] and will Alphabet pick up some market share because of this and because they’re running on Android devices instead? A lot of questions are going to be answered in the next couple of days on this one,” Zechner said.

“My inclination is I like both names. I do like Meta in here and the valuation sticks out as attractive but clearly you’ve got some more shorter term risk depending on [the first quarter] numbers,” he said.