Investing In Facebook Stock (Meta Stock FB) — Why I made the controversial investment decision to initiate a position in Meta. I am not a licensed investment advisor and this article is not investment advice.
I made a controversial investment choice in February 2022 — I started investing in Facebook stock ($META.)
Although I am primarily a dividend income investor, my goal is to invest in undervalued companies that I understand.
Hence why I initiated a position in Facebook stock, which is soon to be known as Meta.
In this article, I will explain my reasoning as to why I’m investing in Facebook stock (Meta stock FB).
Let’s dive in.
Investing In Facebook Stock (Meta Stock FB) — Why FB Is So Controversial
First off, I want to discuss the reason why investing in Facebook stock is a controversial decision right now.
In my view, Facebook is controversial because of the narrative surrounding it.
People view it as a company that breaches privacy and turns customers into products. They see Facebook as a company with unethical business practices.
Otherwise, people who are more traditional view it as unhealthy for social behaviour. They are usually the types who boycott the platform and refuse to use it. That’s completely fine and it’s their prerogative to do so.
As someone who studied business marketing in school, I can appreciate Facebook as an advertising company. They sell advertising because they attract enough eyeballs the same way the television used to.
Admittedly, I have even boycotted Facebook in the past. But at this point in my life, I have adopted a more neutral stance on most topics. I try to remain open minded enough to hear out both sides.
As such, I began researching the company recently after the stock price corrected.
Brief Overview Of The Company
I probably don’t have to tell you about the company but I will anyways.
In short, Facebook, which is now known as Meta, is a social connection company.
They own and operate a collection of social media apps and messaging services.
They started with the Facebook platform back in the early 2000’s. Since then, they acquired or developed other technologies such as Instagram, WhatsApp, Messenger, Oculus, Workplace, Portal, and Novi.
So, even if you are one of the people who attempted to boycott Facebook, chances are that you still use one of their other services anyways.
For example, most people use WhatsApp to stay in touch with family and friends who live far away. It’s also used as the main messaging tool between Apple iOS and Android devices.
And even people who refuse to use Facebook usually still have Instagram.
Simply put, Facebook dominates the communication field.
More recently, the company has been developing its Meta platform so people can connect in the metaverse. According to the company, the metaverse is the next evolution of social connection. It will be a more human-like way to connect on the internet that is optimized for our need to see facial expressions and gestures. Rather than looking at a screen, it will feel like you are really there.
Risks
In my estimation, Facebook has three main risks: TikTok, privacy, and the possibility of Meta failing.
TikTok. Meta even alluded to TikTok in its recent earnings when they mentioned the shift of engagement towards Reels. The concern is that TikTok is taking eyes away from Facebook and Instagram. But I don’t see TikTok as much of a long-term concern. Firstly, TikTok has similar privacy concerns as Meta does, perhaps even more so. Secondly, Meta faced a similar threat years ago with Snapchat and its filters. Look how that turned out. They copied and implemented filters and videos into Instagram and Facebook. Thirdly, even people who use TikTok still post their TikToks on Instagram. Fourthly, I am confident in Meta’s ability to develop and optimize Reels. Fifthly, baby boomers use Facebook like millennials did between 2006 to 2010. I don’t foresee them transitioning to TikTok anytime soon.
Privacy. Meta took a major hit when Apple decided to update the privacy features in iOS. Basically, the changes caused Meta to take a $10 billion dollar hit. Unfortunately for the company, more privacy changes are coming from Android as well. But on the bright side, these changes won’t take effect until 2024. So at least the company will have time to adapt.
Meta. Simply put, the time, effort, and amount of money they are investing in Meta could be a failure. Maybe the metaverse doesn’t take off like they anticipated. Or maybe another company like Apple will do it better.
Otherwise, the company also mentioned macroeconomic challenges such as inflation and currency exchange rates in their recent earnings report. These challenges could affect advertisers’ ability to spend.
Investing In Facebook Stock (Meta Stock FB) — Why I’m Investing
Now that I’ve discussed the risks, let’s look at the reasons why I’m investing in Facebook stock.
Before I tell you my reasoning, I wanted to begin with a quote from Warren Buffett’s recent letter to Berkshire Hathaway shareholders:
“our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO.” — Warren Buffett
I wanted to start with that quote because I feel as though it describes Facebook stock well.
Investing In Facebook Stock (Meta Stock FB) — Why I’m Investing
Quality CEO Who Is Still Very Young
Mark Zuckerberg is a co-founder of Facebook, chairman, controlling shareholder, and the current CEO of Meta.
Whether you like the guy or not, you can’t deny his success or ability to run a company.
Furthermore, at 37 years old, Zuckerberg is still extremely young.
If you compare him to other tech CEOs such as Elon Musk, Zuckerberg is 13 years younger.
Based on his tenacity, passion, and accomplishments, and because he has skin in the game, Mark Zuckerberg appears to be a quality CEO.
Economic Advantages & Communication Moat
As I alluded to earlier, Meta practically owns communication with WhatsApp, Instagram, Facebook, and Facebook messenger.
Communication between Android and iPhone users typically happens through WhatsApp.
If they are right about the metaverse, they could eventually have a moat in that world too.
Even People That Hate The Company Can’t Stop Using It
Plenty of people dislike Facebook for the reasons I mentioned above.
It’s true that it is a polarizing company.
However, most of the people who dislike the company can’t stop using it. It’s a sticky business.
People who deactivate their Facebook accounts eventually come back. Deep down, they want to see all the animal and baby photos that all their old friends are sharing. It’s human nature to want to see how people you used to know are doing.
But even if they never reactivate Facebook, they are likely on Instagram or WhatsApp anyways.
If you truly don’t like what the company stands for, stop using it and all of its services completely. Otherwise, you are just being hypocritical.
The Stock Is Historically Cheap
Another one of the brilliant quotes from the Berkshire Hathaway letter was as follows:
“Our appetite remains large but will always remain price-dependent.” — Warren Buffett
Fortunately, Meta stock is historically cheap right now compared to other tech stocks.
In fact, it’s actually trading at a cheaper price than many value stocks as well.
When I was searching for stocks to buy earlier this week, I had a very hard time finding a stock with a cheaper valuation.
At roughly 15 times earnings, a tech stock with a market capitalization of nearly $600 billion is trading within a price range that even Ben Graham would find attractive.
According to Morningstar, the fair value estimate is $324.49 per share. Meanwhile, the stock is trading around $200 per share.
Furthermore, Meta is trading at a historically low price to sales ratio of around 5. This is the lowest it’s been in a decade.
Out Of Favour With The Market
“Investors make money most safely and most easily when they do things that other people are unwilling to do.” — Howard Marks
Most people view something that is out of favour as a bad thing.
On the other hand, a contrarian views it as an opportunity.
I mentioned all the reasons that Facebook is out of favour with the market above.
In my view, the stock is oversold and the selling has created a tremendous opportunity for buyers.
In fact, it actually reminds me of when Apple was out of favour with the market back in 2018. Investors were concerned that the smartphone market was oversaturated and that they were shifting to a services business. I looked at the ridiculously strong balance sheet, world-class brand, and top-of-line products and determined that the sell off was a buying opportunity.
In my opinion, history is repeating itself with Facebook.
Cash Flow Machine
Meta expects first quarter revenue to be somewhere between $27 to $29 billion, which works out to 3 to 11% year-over-year growth.
Simply put, the company generates a lot of money.
Businesses that generate a lot of cash are in position to reinvest back into the business, buy back stock, or pay dividends.
Of course, the concern is that they are investing too much revenue back into the metaverse.
At this point, Meta does not pay a dividend. They still expect to generate higher returns for shareholders through reinvesting back into the business.
But they are using some of their cash for share repurchases. As of December 31, 2021, the company has $38.79 billion available and authorized for share repurchases.
Personally, I love share buybacks and I am happy to see them putting their cash to use. I hope they have been buying back shares during the recent dip.
The Potential Of Meta
I had the opportunity to test out VR once and was seriously impressed with it.
I also recently listened to the Lex Friedman podcast with Mark Zuckerberg. During the podcast, Zuckerberg discussed in more detail what the metaverse will look like. He discussed how it could create an entirely new economy online.
One of the things I found particularly interesting was that Meta employees are already holding meetings in the metaverse.
In addition, Mark alluded to how workers in the future could work in a dream office within the metaverse. For example, a coder could sign into the metaverse and work in the perfect setting for their work. If it turns out that employees are more productive in the metaverse, even a 5% rate of productivity improvement could be enough for more companies to invest in the metaverse for employees.
Obviously, it’s still early and it is yet to be seen. But there are many promising reasons to believe in the potential of the metaverse.
Other companies like Apple are betting heavy on the metaverse as well.
Personally, I envisioned how the metaverse could impact retail years ago. Imagine signing onto to the metaverse and visiting the most beautiful store you’ve ever shopped in. While in the metaverse, you pick out items and place them in a shopping cart just as you would in a real department store. Then when you sign out, the items are delivered to your door.
Moreover, the metaverse could also take a person to different points in time. For example, maybe you wish to shop at a store that no longer exists, or visit a different period of time. The metaverse could make this possible.
Investing In Facebook Stock (Meta Stock FB) — Final Thoughts
“I’m encouraged by the progress we made this past year in a number of important growth areas like Reels, commerce, and virtual reality, and we’ll continue investing in these and other key priorities in 2022 as we work towards building the metaverse.” — Mark Zuckerberg
Now you know why I’m investing in Facebook stock.
Based on the valuation that is extremely cheap, communication moat, young CEO, and the potential for the future, I think it’s hard to find a stock I have higher conviction with right now.
As such, I am extremely bullish and inclined to bet heavy. Unfortunately, investing in Meta will not boost my dividend income. But as Warren Buffett said, it’s best to make meaningful investments in companies with durable economic advantages, and investing should always be price-dependent.
As always, I am telling you what I am doing with investing and not offering advice.
If you don’t think investing in Facebook stock is a good idea, feel free to tell me why you think that in the comments below.
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