FB Stock: Fundamentals, Valuation, and Outlook

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Meta (NASDAQ: FB), formerly known as Facebook, has recently shifted its business model into a virtual reality-focused business, coining the name “Meta” as they hope to build a digital ecosystem known as the metaverse.

Meta (NASDAQ: FB), formerly known as Facebook, has recently shifted its business model into a virtual reality-focused business, coining the name “Meta” as they hope to build a digital ecosystem known as the metaverse.

 

This includes plans to ramp up capital expenditures in the hopes of revolutionizing the way people interact in virtual environments. This includes $10 billion of spending in the Reality Labs segment which works closely with Meta subsidiaries such as Oculus, which is a hardware and software company focused on pioneering the metaverse.

 

Meta shares were strong throughout 2021, growing over 25.07% year-over-year. Heading into 2022, the future looks extremely bright as the opportunity to capitalize on virtual reality is imminent. While higher spending may lead to reduced profitability in the short term, this will likely diversify Meta’s business, decreasing the effects of more potential advertising hurdles.

 

The Fundamentals

 

For many businesses, especially ones that are growing at the pace of Meta, the fundamentals tend to be volatile. However, this is not the case for Meta.

 

Meta has a track record of outstanding revenue and earnings growth. For reference, in the third quarter of 2021, revenue grew to over $29 billion, while earnings increased to $9.19 billion.

 

However, capital expenditures did grow faster than revenue in the third quarter, showcasing that Meta is serious about building the foundational technologies to the metaverse. This took a toll on its net-profit margin, falling to nearly 31.7%. Although, this is still substantially high, even after decreasing by over 13.2% year over year.

 

Regardless of changes to advertising policies that disrupt current techniques, Meta will likely bounce back as it can optimize its advertising strategy. The proof is in the numbers. Despite recent changes to the way Facebook advertises to consumers through its ecosystem of products and services, revenue growth remained strong year-over-year in their recent quarter, growing by 35%.

 

Meta’s fundamentals are astounding, which is why so many investors flock towards this high-margin social media, now metaverse-focused company.

 

Valuation

 

Most large-cap stocks have continued to make new all-time highs, resulting in higher valuations. However, Meta shares have seen the opposite, which includes short-term declines while fundamentals continue to improve.

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By using a price-to-earnings ratio, we can compare Meta to other large-cap companies.

 

For instance, the trailing twelve months price-to-earnings ratio for Meta ($FB) is 23.59, whereas Apple ($AAPL) has a price-to-earnings ratio of 31.99. Not only is Meta trading at a discount compared to other large-caps, but also is over 9% down from its all-time-high share price.

 

Buying at new highs for any stock is challenging for many investors, so having that safety of the stock already being discounted is a substantial benefit.

 

This is a great opportunity for investors who are looking for an undervalued blue-chip stock that has perpetual earnings and revenue growth while also being undervalued compared to others.

 

Outlook

 

Looking out into the long-term of Meta’s business objective, we know that virtual and augmented reality will become a primary focus. This comes from wanting to control the devices which have their products and services, as Apple currently has the power to affect their business with a shift in IOS rules for advertisers.

 

Meta’s virtual reality segment looks extremely promising right now since Oculus controls over 75% of the total virtual reality market according to data in the first quarter of 2021 by Counterpoint Research.

 

There is already competition in the virtual reality space, but this doesn’t stop Meta’s Oculus from dominating in the slightest. This is a clear indicator from the consumer side that Oculus provides more affordable high-quality hardware than anyone in the market today.

 

Advertising potential could be significantly increased if pushed onto the Oculus platform with applications such as Instagram, Facebook, and Whatsapp, diversifying in the case of more IOS policy changes from Apple.

 

Users can currently use social media services on Oculus products, but it is underutilized by consumers at the moment. Although, this will likely change since it’s more convenient to keep the headset on and check social media, than taking it off and checking your phone.

 

This is a great move from management which should greatly benefit shareholders over the long term.

 

Final Thoughts

 

Meta has fundamentally proved that its company is extremely profitable while continuing to grow earnings year-over-year. There are very few stocks at the moment that are fundamentally strong, down from all-time highs, and have a solid business trajectory over the long term.

 

Pushing for virtual reality is the right step to shifting users onto Meta-owned devices even if profitability is slightly reduced in the short term.

 

Overall, optimism remains on Meta over the short-term and long-term as the fundamentals are phenomenal now and likely will be years from now, judging by the roadmap and management’s conviction to succeed.

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