Interactive Investor

A buy-the-dip opportunity at this Goliath

This company has experienced explosive growth with the promise of considerable further revenue growth in the near future. Our overseas investing expert Rodney Hobson looks at a big tech stock that has sent shareholders on a roller-coaster ride.

23rd August 2023 09:52

by Rodney Hobson from interactive investor

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Companies rarely grow big without upsetting a few people along the way. The question is whether social media giant Meta Platforms Inc Class A (NASDAQ:META) has got too big for its boots and made too many enemies.

Latest results for the Facebook, Messenger, WhatsApp and Instagram owner are very encouraging, thanks to increased spending this summer by advertisers who believe that the possibility of recession has at least receded and may even be averted in most major economies.

Revenue rose 11% to $32 billion in the second quarter, while net income easily beat analysts’ forecasts with a 16% increase to $7.8 billion. The figures prompted Meta to raise its predictions for the third quarter, with revenue now seen at $32-34.5 billion. Well over 90% of revenue comes from advertising on the various social media platforms, mostly from the US, Canada and Europe but more than a third from the rest of the world, demonstrating the global spread of the group.

Meta now has a total of nearly four billion active monthly users across its various platforms, exchanging messages, news of varying degrees of accuracy, photographs and videos. It has survived the risky decision to drop its Facebook name for the whole group – the brand name was widely recognisable around the world – and adopting a corporate name that reflects its ambition to focus on the ill-defined but potentially infinite digital realm of “online connectivity”.

Threads, it’s text-based rival to Twitter, has been launched at what could be an opportune time with Elon Musk alienating and confusing Twitter users by renaming his site X and playing around with its pricing structure.

The one potential cloud is the growing resentment in countries outside the United States at the way giant tech companies have manipulated their accounts to minimise tax bills while maximising profits by using personal data to increase advertising revenue.

Norway’s data protection agency has this month decided to fine Meta nearly $100,000 a day for allegedly defying a ban on using personal information to target ads in a row over data protection. This is a dispute that could quickly spread throughout the European Union and Switzerland.

Meanwhile, Canada is complaining that Meta is putting profits before people by blocking news content, in this case about the wildfires racing through the Northwest Territories and British Columbia. Meta says it is complying with a new Canadian law that requires tech platforms to pay publishers for linking to or reusing content.

Herein lies the restraint on governments wanting to take on Meta: the use of its platforms is now so well entrenched that it is part of ordinary citizens’ way of life.

Meta Platforms chart

Source: interactive investor. Past performance is not a guide to future performance.

It has been a roller-coaster ride for Meta shareholders, from $150 in March 2020 to a peak of $380 just 18 months later before a slump to below $100 last October. A subsequent strong recovery saw the shares hit $325 but they have come off the boil again to stand just below $300, a level that has proved to be a ceiling in the past and could well be a floor now.

However, the price/earnings ratio of nearly 34 assumes considerable further revenue growth in the near future and there is no dividend as profits are ploughed back into expanding the business, notably the Reality Labs metaverse division, which lost $3.74 billion in the latest quarter and will be substantially further in the red for the foreseeable future.

However, there is no denying that this company has grown exponentially since it was established less than 20 years ago and it now has more than 70,000 staff and a stock market capitalisation of more than $700 billion.

Hobson’s choice: This is not a company for dividend seekers nor for the faint-hearted, but over time the share price looks set to rise. The recent dip has created a buying opportunity.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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