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Tech stocks continue to take a beating in 2022, and few stocks display this fact better than Meta Platforms (NASDAQ: META). Most of the market outside of the energy sector has suffered badly this year, and bullish stories about big tech companies keep pouring in on Seeking Alpha. Today I will explain why Meta, despite its cheap valuation, is not a buy today.

Investment thesis

Meta Platforms is one of the best covered stocks on Seeking Alpha, and it seems like I see a bullish story almost every day. Despite a cheap valuation where the company is trading below 10x earnings for the first time in its history, I’m still not a buyer here. I don’t believe in the company transitioning to the Metaverse through Reality Labs, and it looks like the spending will only increase over the next two years.

Not only is the company burning through cash to fund its Metaverse push, but it also spent billions last year buying back shares at much higher prices while CEO Mark Zuckerberg sold billions. Many investors point to buybacks at a cheap valuation as a reason for optimism, but I don’t know if we’ll actually see the stock count decline due to large stock-based compensation spending. While I understand why many authors are bullish on Meta, but I’m not bullish on the future of Metaverse, which is why I’m not bullish on Meta today despite its massive sell-off.

The Metaverse

The investment case for Meta depends on the success or failure of Metaverse development. While Instagram and Facebook continue to advertise Meta’s cash cows, the company continues to pour billions of dollars into Reality Labs. Research and development spending appears to continue to accelerate, and Zuckerberg said so in the latest earnings call.

The authors of Seeking Alpha have a wide range of opinions on the metaverse, and I’m sure you know most of them. Personally, I won’t be a Metaverse user, no matter how awesome the technology is. Real life, for all its ups and downs, will always be better than the Matrix. Because I don’t believe in Zuckerberg and his vision for the Metaverse and the future of the company, I see no reason to be a shareholder. If the Reality Labs segment were closer to balance, it would be easier to make the bullish case for Meta. This is clearly not the case here. The Reality Labs segment has already lost $9.4 billion in the first nine months of 2022, which has just started showing up in financials.

The balance sheet

Meta has had an impressive track record for as long as I can remember. Cash and cash equivalents have been down slightly since the end of the year and they recently issued $10 billion of debt in August. Although they still have a strong balance sheet, the spending spree on the Metaverse will likely lead to lower cash levels as Reality Labs’ losses are expected to rise next year. The effects of Reality Labs are much more evident on the income statement, especially the breakdown by segment.

The income statement

Overall revenue was flat in 2022 ($84.4 billion vs. $84.3 billion in the first nine months of 2021) and I wouldn’t be surprised if we see a drop in revenue in 2023 as the economy slows down and advertising spending slows down. I’m curious to see what will happen to the social media user base over the next two years as well. Personally, I don’t use Facebook or Instagram, but I wouldn’t be surprised if we see fewer people using both platforms in the coming years.

$1.4 billion in revenue in the first nine months for Reality Labs (a slight increase from the first nine months of 2021) resulted in a loss of $9.4 billion, compared to an already massive loss of 6, $9 billion in the first nine months of 2021. While I prefer to look at the first nine months because it paints a bigger picture, the last quarter for Reality Labs wasn’t pretty either. Revenue fell significantly to $285 million in the third quarter, well below last year’s third quarter and the first two quarters of 2022. The $3.7 billion loss for the quarter me makes me wonder what the results will look like if revenue stays low while research spending continues. increase. These issues, combined with the sell-off, have led to a cheap valuation, which could prove to be a value trap.

Evaluation

Meta’s valuation looked cheap for a while, and there was no shortage of bullish cover on Seeking Alpha. There have been many articles in 2022 with the opinion that Meta is cheap and the Metaverse will pay off down the road. While I agree to disagree on the Metaverse, Meta is as cheap as it’s ever been if the forward estimates turn out to be accurate.

Meta PER

Prices/Benefits (fastgraphs.com)

Shares are currently below 10 times earnings. If you had told me that Meta would be trading at a single digit multiple in 2022, I’m sure many investors (including myself) would have thought you were crazy, but here we are. The company has a market cap of $240 billion, but I still think the Reality Labs black hole will turn into a nightmare for the company. Another cash black hole for Meta has been the company’s buyback program.

Redemptions

Although the valuation looks cheap, Meta has also set cash on fire over the past two years with its buyback program. They’ve spent $21.1 billion so far in 2022, which adds up to $24.5 billion at much higher prices in 2021. Despite the huge amounts of money being spent on buyouts, the number of shares has remained essentially flat over the past five years, a symptom of the company’s large stock-based compensation program.

Outstanding Meta Shares

Outstanding shares (fastgraphs.com)

Most of the bullish articles I’ve read on Meta point to the company’s ability to buy back massive amounts of stock at cheap valuations, and I certainly understand where that’s coming from. However, I wouldn’t be surprised if stock-based compensation continues to absorb a good portion of buyouts. There’s another piece of 10-Q that struck me when I was doing my research.

We do not intend to pay cash dividends in the foreseeable future.

We have never declared or paid any cash dividends on our share capital. We currently intend to retain any future earnings to fund the operation and expansion of our business and to fund our share buyback program, and we do not anticipate declaring or paying cash dividends in the foreseeable future. Accordingly, you may only receive a return on your investment in our Class A common shares if the price of your shares increases.

I get it, people have invested in mega cap tech companies for the high margin growth over the past decade, not for the potential for dividends. However, if a company as profitable as Meta has been for the past decade isn’t going to pay a dividend, it’s not going to happen any time soon. All things being equal, I prefer to own stocks that pay me to own them, although there is an argument to be made that it is not as tax efficient. If I were invested in Meta, I would definitely prefer to see $45 billion paid out in dividends over the past two years instead of buybacks to drive the stock price higher as Zuckerberg sells a large number of stocks in 2021 .

Conclusion

A bet on Meta is a bet on two things: the success of Mark Zuckerberg and his vision for the Metaverse. I don’t see the future of the Metaverse, and I certainly have no intention of logging into the Matrix, but I can see the appeal of a high-tech escape like the Metaverse. Although some may disagree with my opinion of the Metaverse, it has become clear to everyone that Reality Labs will continue to consume a large amount of money.

While finances have been impressive in the past, I think Meta’s best years are in the rearview mirror. The main reason for optimism is valuation. Despite the uncertainty surrounding the business, Meta is as cheap as it’s ever been with a sub-10x earnings multiple. The other thing that bullish investors often point out is the extensive share buyback program. However, if the last five years are any indication, buyouts will offset stock-based compensation and not much else.

I’m fully aware that this probably won’t be popular with most readers, but different opinions are what make a market. Meta is down 57% since my last post on the company where I said Meta is cheap for a reason. The comments section was certainly entertaining on this and I expect this one to be the same. While I don’t think Meta is a sell because the valuation is cheap (for now), I wouldn’t buy here either. If you have tax losses to reap, now might not be a bad time to sell Meta and disconnect from the Matrix.