Meta Platforms, like wine, gets better with age

A smartphone with Facebook’s logo is seen in front of displayed Facebook’s new rebrand logo Meta in this illustration taken October 28, 2021.

NEW YORK, July 27 (Reuters Breakingviews) – Maturity isn’t such a bad thing for Meta Platforms . Sure, advertising at the $430 billion social media platform is under threat, and user growth is slowing, while the Facebook parent’s new virtual world looks a little like a corporate mid-life crisis. But the business is showing the benefits of age, like decent profitability. Through a new set of bifocals, it might even look undervalued.

That’s probably hard for investors to accept given Facebook was growing like a weed, and now isn’t. Revenue jumped more than 60% between 2019 and 2021, but on Wednesday Meta said that total revenue in the second quarter actually fell 1% compared to the same quarter last year, and that third-quarter revenue is likely to be flat at best. Meta depends on selling advertising for its revenue, and the average ad price fell 14%.

How users engage is a concern too. Facebook only had 1% more active users in the quarter ending June than it did a year earlier, and lost a few from the preceding quarter. Still, some signs suggest Meta is standing the test of time. Though the average minutes spent on its apps are declining, Facebook and Meta-owned sibling Instagram are second and third in engagement behind newer TikTok, according to research from Cowen.

Having been around the block, Meta at least knows how to turn a profit. Its EBITDA margin is expected to be 40% this year, according to Refinitiv, far better than Twitter (TWTR.N), which is about half that, and even higher than Google parent Alphabet (GOOGL.O).

That profitability deserves more credit. Even if Facebook’s top line were to fall 20% but margins stayed the same, investors would only have to honor Meta with an enterprise value of 8.5 times EBITDA to justify its current enterprise value of $387 billion. That’s far less than the 10 times the market awards Google read more , and a quarter of where Twitter is valued.

Of course, that depends in large part on Zuckerberg controlling his spending on new ventures. Research and development costs jumped in the second quarter, taking down the company’s margins. A firmer grip on exercises like the metaverse might mean less growth for a while. But maybe Meta is like a fine wine in two ways: It gets better with age, and appreciating it requires a discerning palate.

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CONTEXT NEWS

Meta Platforms on July 27 reported second-quarter revenue of $29 billion, a 1% decline from the same quarter the previous year. The company had 2.9 million monthly active users, an increase of 1% year-over-year, but a slight decrease from the previous quarter.

Editing by John Foley and Sharon Lam

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