Investors are more than a little upset with what Mark Zuckerberg had to say about Meta’s upcoming artificial intelligence investments.
Meta Platforms (META 0.43%) recently presented first-quarter results that exceeded expectations on the top and bottom lines. Instagram, WhatsApp, and Facebook outperformed expectations, but shares of their parent company still fell hard in after-hours trading.
Meta stock was down about 15% when the market opened on Thursday, April 25. Here’s a look at why it fell and reasons it could be a good stock to buy on the dip.
Why Meta Platforms stock fell after announcing first-quarter results
Meta stock is down partly because its revenue projection for Q2 was a little lighter than expected. The average analyst on Wall Street expects $38.29 billion in total revenue, but management guided to a range between $36.5 billion and $39 billion.
In addition to a soft revenue projection, the market is reacting negatively to what many investors see as another of CEO Mark Zuckerberg’s enormously expensive pet projects. This year Meta expects capital expenditures to land in a range between $35 billion and $40 billion as it hurls money at a generative artificial intelligence (AI) chatbot. A few months ago management told investors to expect between $30 billion and $37 billion.
A new AI chatbot that can compete with Microsoft and OpenAI’s popular ChatGPT service could be extremely valuable. Unfortunately, Zuckerberg’s metaverse blunder is making investors justifiably nervous. Over the past decade, Meta Platforms has spent more than $50 billion trying to build interest in the metaverse with dismal results.
Operating losses from Reality Labs, the segment that houses metaverse operations, grew to $16 billion over the last 12 months, which was $2.3 billion more than the division lost in 2022. The company can’t even keep total metaverse-related sales from shrinking. Revenue from Reality Labs over the trailing-12-month period fell to $2 billion from $2.2 billion in 2022.
Reasons to buy Meta Platforms on the dip
Unlike the metaverse, there’s already plenty of demand for chatbots. Getting folks to use a free one should be a lot easier than asking them to strap a smartphone to their face.
The sums that Meta intends to spend on new products that might never pay off are staggering. The stock is still a buy because its well-established advertising business is profitable enough to overcome the losses.
Last year was a generally lousy one for the cyclical advertising industry. Despite a cyclical challenge and metaverse losses, Meta Platforms’ return on assets never fell below 12% in 2023.
META Return on Assets data by YCharts.
It’s been more than 8 years since the company reported a return on assets below 10%. That’s heaps better than peers like Pinterest and Snap, both of which have been reporting negative returns.
With reported returns that are much better than its social media industry peers, it’s clear that Meta benefits from a strong competitive advantage, in this case, a network effect. Meta’s profits aren’t the only sign of a strong network effect either. In Q1, the company averaged a stunning 3.24 billion daily active users across its family of applications.
The rapid rise of TikTok proves that this industry can turn on a dime. That said, Meta’s network effect appears durable. For example, you might find Facebook’s incessant recommendations and advertisements off-putting, but you probably keep the app on your phone for access to local groups and events.
A fair price
Meta Platforms is going to spend heaps on AI and metaverse initiatives, but it’s returning even more to investors. The company declared a dividend earlier this year that currently offers a 0.5% yield. Plus, it returned $14.6 billion to shareholders in Q1 in the form of share repurchases.
Trailing-12-month earnings per share are up by 153% over the past five years, and the next five could be just as successful. Despite Meta’s proven track record, the market isn’t expecting much growth from Meta Platforms. At recent prices, you can buy the stock for just 21.6 times forward-looking earnings expectations. Scooping up some shares on the recent dip to hold over the long run looks like a smart move.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Microsoft, and Pinterest. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
