Meta Platforms Looks Risky as Its Metaverse Spending Increases

While down massively from its pandemic-era highs, it’s easy to see why some investors are still interested in Meta Platforms (NASDAQ:META) stock. At today’s prices, it sports a low valuation. This makes it appealing to many in the value-investing community.

Although it is currently dealing with growth deceleration, growth investors still may see big potential for it to re-accelerate growth, with its move into the metaverse. Yet while all this points to the stock being a possible buy, as it remains out of favor, those looking to take the plunge on it now should keep something in mind.

The numerous headwinds that have knocked it lower so far this year continue to persist. In fact, shares could hit new lows before a comeback begins. The decision to buy it is not as simple as it seems at first glance.

META Stock and Its Big Price Decline

Since the start of the year, both market and company-related factors have played a role in sending shares in the social media giant down by about 50%. First, of course, has been the sentiment changes in the stock market. Rising interest rates and increased concerns about a recession have led investors to shun growth stocks.

Second, issues directly related to the company have put big pressure on META stock. A softening advertising market has affected the company’s underlying performance. Its results for the fiscal second quarter (ending June 2022), indicate its revenue fell 1% compared to the prior year’s quarter.

At the same time revenue growth has gone negative. The tech giant has been throwing billions into its metaverse projects. This has resulted in a big decline in earnings. Last quarter, earnings per share fell 32%.

Sure, you can say that its worsening operating performance has been more than factored into its valuation. Especially as Meta’s price decline in 2022 exceeds that of most of its FAANG peers.

Again though, you shouldn’t make the assumption that the stock has fully absorbed these market and company-related headwinds. As they persist, shares could keep moving lower.

META May Stay Under Pressure

META stock may appear to be on the verge of bottoming out, but there’s a strong chance that it continues performing poorly as a result of the same pressures that knocked it lower in the first place.

While there may be hope that inflation cools sooner than expected, enabling the Fed to ease on rate hikes, the central bank remains on track to continue raising them, for now. This will continue to weigh on stocks across-the-board. Even those with relatively low valuations like Meta Platforms.

As for company-related issues, as the economy keeps slowing down, the slump in digital ad demand is getting worse, not better. This will continue to affect the company’s top-line numbers over the next few quarters.

Not only that, Meta isn’t slowing down when it comes to its big bet on the metaverse. This points to earnings remaining depressed compared to prior year levels.

CEO Mark Zuckerberg remains confident that this big will pay off. However, when the company unveiled some of what it’s worked on so far with this endeavor to the public, the response was largely critical. A similar response to its metaverse conference next month could be something that pushes shares lower.

The Verdict on META Stock

Don’t let this stock’s low valuation deceive you. It’s cheap for a reason (worsening operating results). If the ad market softens further due to a recession, its operating results could get worse. This may push shares even lower, ultimately making it a value trap.

Don’t let its high exposure to an exciting trend (the metaverse) cloud your judgment, either. It remains to be seen whether the metaverse trend will become the “next big thing,” or if at best it’ll become a niche market. That’s the view the market has taken.

Unless Zuckerberg scales back the size of his current “bet the ranch” wager on the metaverse, chances are this factor will continue to be a negative for shares.

Following the market downturn, there are many tech names that are appealing as long-term buys. META stock, unfortunately, isn’t one of them.

META stock earns an F rating in my Portfolio Grader.

On the date of publication, Louis Navellier had a long position in META. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.