'Investor trap': WSJ urged not to be seduced by 'throwaway price' of Meta shares

Meta Platforms shares look like a rare opportunity for investors: the securities are trading cheap by the standards of large technology businesses. However, their "throwaway price " is more of a warning about the dim prospects of Mark Zuckerberg's company than a good entry point for its capital, according to The Wall Street Journal (WSJ).

Recently, Meta's quotes have lagged behind the market due to concerns about the justification of multi-billion dollar expenditures on artificial intelligence. As a result, its shares have started to look "unusually cheap": the company's stock price to earnings (P/E) has fallen to its lowest level in three years, and even taking into account future earnings, the securities of the holding company of Instagram and Facebook are sold at a significant discount to the rest of the bigtech, states WSJ.

Meta's attractive share price is supported by the rapid growth of its advertising business, which generates almost all of its revenue. In the first quarter, sales soared by 33% - a staggering result for a corporation of this size. The company has been more successful than competitors in implementing neural networks in targeting: smart algorithms are steadily increasing clickability and conversion into purchases (6% growth for the quarter). Meta is demonstrating practical returns from AI in its core business at the very moment when the market is increasingly demanding to prove the return on such investments, WSJ recognizes.

However, a leading US business newspaper sees several reasons to "doubt that Meta's celebration of artificial intelligence will last long."

- Audience stagnation. Despite a colossal base - over 3.5 billion daily active users of Facebook, Instagram, WhatsApp and Messenger - its growth is tapered. The audience grew 4% year-over-year in Q1, but declined quarter-on-quarter for the first time since 2019. Meta executives expect that integrating AI into ads will provide a margin of safety for revenue growth. But without an influx of new users, the returns from AI within the advertising model will inevitably reach a "natural limit," the WSJ points out.

- Scarcity of backup options. Unlike its competitors, Meta does not have alternative sources of revenue and "airbags" in the form of cloud computing, e-commerce or enterprise software - like Amazon, Microsoft and Google. Non-advertising projects such as VR headsets and smart glasses have either failed or are too small to compensate for a possible slowdown in advertising revenue growth, the publication emphasizes.

- CAPEX and debt load growth. Participating in the AI race with Google and OpenAI requires Meta to make huge injections: last week the company increased its capex forecast for the current year by $10 billion - to a range of $125-145 billion. The projected costs are growing faster than revenue, and to finance them the company is rapidly increasing borrowings - its balance sheet already includes more than $57 billion of long-term debt, not counting a new $25 billion bond issue and the debt of an off-balance sheet structure that is building a $27 billion data center in the United States, the business newspaper notes.

- Regulatory and litigation risks. As Meta tries to make its way to the forefront of the AI race, it faces a number of legal challenges that are more difficult to quantify but could have a serious impact on its business and audience growth. Australia banned minors from using social media in December, and recent defeats in U.S. courts over social media addiction and harm to children could lead to more lawsuits, the article said.

On April 29, Meta published its quarterly report, after which its quotes collapsed by 10%. According to MarketScreener, since then, 20 investment banks and analytical companies have updated their forecasts: 17 of them lowered the target price of Meta shares, while 19 experts retained their previous, mostly positive recommendations (Buy, Outperform or Overweight).

The most significant adjustments of targets on Meta securities were made by analysts of Jefferies (from the previous $1000 to $825 per share) and New Street (from $980 to $730). The only financial institution that lowered the company's rating (from "above market" - Overweight - to "neutral") was JPMorgan Chase. Three investment banks - Barclays, Wells Fargo and BofA - contrary to the general trend, slightly increased price targets for Meta shares.

Moreover, while UBS positively assesses Meta's prospects in the second quarter due to the continuous improvement of the advertising mechanism, Bank of America notes growing concern about profitability against the background of increasing costs of the company. Similar skepticism is shared by analysts of JPMorgan, who demanded from the corporation "more clarity" on the timing of "payback of investments in AI outside the core advertising business".

This article was AI-translated and verified by a human editor