Meta Platforms Stock: Going Nowhere With Mounting Problems

Meta Platforms, Inc. (NASDAQ:META) stock has recovered nearly 30% since our previous article, as we highlighted market operators drew in holders rushing to flee quickly at its post-FQ3 earnings selloff lows.

As such, META has performed remarkably as it outperformed the S&P 500 (SPX) (SP500) (SPY) significantly since then. Despite that, it offers scant consolidation to investors who bought into CEO Mark Zuckerberg’s metaverse pivot in early 2022, as META remains down nearly 70% YTD.

Hence, the critical question facing META is whether the mean-reversion rally against its downtrend bias has run its course. Do investors still have near-term upside to capture if they add at the current levels? Or should they wait for a deeper pullback since the digital advertising market is still expected to be weak in 2023?

Meta continues to face a plenitude of challenges in its core business and also its metaverse ambitions. European regulators have amped up their response against America’s big tech companies, such as Meta.

Even the mighty Cupertino company, Apple Inc. (AAPL), is considering opening up its ecosystem to third-party App Stores to fulfill its obligations to operate in the European Union when enforcement arrives by 2024.

Notwithstanding, tremendous uncertainties remain regarding how the EU could proceed with its enforcement. A recent WSJ article suggests that European regulators consider adopting an “experimental” approach to the new regulations to balance consumer protection priorities and protect innovation. It highlighted:

The commission can avoid these mistakes if it treats its new regulations as experiments, rather than as rigid mandates. Instead of relying on their intuition about how a law might play out in theory, and then turning a blind eye to what happens in practice, the commission should test the performance of the regulations, and improve them as it learns about what works and what doesn’t. – WSJ

While still working out its regulatory compliance, we believe Zuckerberg and his team likely didn’t welcome a recent report suggesting Meta and Google (GOOGL) (GOOG) are losing their grip as market leaders. Accordingly, Axios reported Meta’s share in 2022 is expected to fall to 19.6%, down slightly from 2017’s 20% share.

Hence, questions abound about whether Meta’s share has peaked, as the digital advertising industry continues to slow, while upstarts like TikTok (BDNCE) continue to take share rapidly. In addition, Amazon’s (AMZN) advertising has also been gaining clout, cementing its lead as the leading retail media ad player.

Insider Intelligence is even more downbeat on Meta’s business model, as it downgraded its US social network ad spending forecasts through 2024. It sees share gains in Connected TV (CTV), TikTok’s growing influence, and retail media ad that threatens to dislodge Meta and its social media peers from their perch. It highlighted:

We’ve made a massive and unprecedented reduction in our US social network ad spending forecast. Social’s share of total digital ad spending will shrink every year through 2024 at an accelerated rate. In our current forecast, the social share of digital will come out to 25.5% in 2024 after peaking at 28.6% in 2020. By the end of our forecast period in 2024, [spending] will grow to $79.28 billion compared with our previous expectation of $99.92 billion (a $20.64 billion difference). – Insider Intelligence

So what’s Zuckerberg’s strategy in dealing with the troubles that have engulfed Meta’s core business? You probably guessed it! Off to the metaverse! Meta CTO Andrew Bosworth accentuated that the company would not shy away from critical investments just because of worsening macroeconomic headwinds. Notably, he believes that should Meta pull back now, it could have “disastrous consequences,” as he articulated:

A 20% investment in futuristic technologies is a level of investment we believe makes sense for a company committed to staying at the leading edge of one of the most competitive and innovative industries on earth. Economic challenges across the world, combined with pressures on Meta’s core business, created a perfect storm of skepticism about the investments we’re making. – Bloomberg

Should Investors fully trust Bosworth and Zuckerberg and their Reality Labs team in their bid to outmaneuver Apple and Google as they look to launch their AR/VR devices moving forward?

Meta’s former consulting CTO for Reality Labs John Carmack highlighted his frustration with Meta’s leadership, accentuating a “notable gap between Mark Zuckerberg and (him) on various strategic issues.” He added:

I have always been pretty frustrated with how things get done at FB/Meta. Everything necessary for spectacular success is right there, but it doesn’t get put together effectively. – John Carmack’s Twitter

Therefore, we weren’t surprised when The Information pieced together a recent exclusive into Meta’s recent failures with its AR efforts. Notably, Meta’s lack of a dominant hardware ecosystem could be one of the biggest stumbling blocks in its attempt to fend off the competition of Apple’s mixed reality device when launched.

In a recent piece, Bloomberg’s Mark Gurman articulated that even Apple has been facing mounting challenges in developing a pure-AR device, as “the technology just isn’t there yet.”

But Apple has the iPhone, a critical piece that could solve its AR puzzle. And that missing link has hampered Meta’s AR efforts significantly, as The Information highlighted:

While Meta already sells VR headsets, AR glasses promise to be a bigger market because they’re lighter weight and could be worn for much longer. But AR glasses are so technically complex that they’re expected to need to pair with another device, such as a phone, to operate at full capacity-at least until the technology advances. And Meta, unlike Apple, doesn’t make lots of different hardware devices. If Meta were to rely on an Apple-made device as an accessory for a future AR product, it could run into problems, as the Ray-Bans episode shows. For Apple, meanwhile, its ecosystem of devices could give it a big advantage over Meta in the AR market. – The Information

Hence, the critical question is whether Meta investors believe Zuckerberg can dig it out of the abyss with his metaverse ambitions. Or whether his attempt to reshape WhatsApp into a “super app” is successful, even as its monetization remains highly unproven. Thinking it could transform into Tencent’s (OTCPK:TCEHY) WeChat is highly speculative, as the “app’s evolution and business model are drastically different.”

Therefore, while we concur that META’s valuation has been well-battered, we assessed that its recent recovery has likely reflected its near-term upside.

The structural challenges in Meta have likely worsened, particularly in its core business. With Reality Labs’ ambitions still far from fruition, META could languish in these zones for years.

Revising from Buy to Hold. Wait for the next plunge to add.