Meta Platforms: Is FB Stock Dirt Cheap or Cheap Dirt?

• A warning from Snap (SNAP) sent Meta Platforms (FB) stock down nearly 8%.
• It now sells for less than 14 times last year’s earnings.
• Failure to meet this quarter’s estimates could send it even lower.

Shares of Meta Platforms (NASDAQ:FB), formerly known as Facebook, dropped sharply after rival Snap (NYSE:SNAP) warned of slowing growth.

FB stock has now lost nearly half its value in 2022, opening May 25 at about $180 per share. That’s a price-to-earnings ratio of under 14x and a market cap of $490 billion.

While Meta is one of the kings in the cloud space, with a network of 15 cloud data centers, its value is based on ad revenue from its Facebook and Instagram social networks. WhatsApp, its free messaging application, is only now starting to bring in cash, with a cloud-based Application Program Interface (API).

Bull Case for FB Stock Explodes

The latest stock market disaster comes just weeks after TV analyst Jim Cramer doubled-down on Meta stock, telling TV viewers bears are going to be “very wrong.”  He predicted the company’s “Reels” video app will “blow away” rival TikTok and that it can render anything without goggles. The stock is now back to where it was before announcing earnings on April 27. Then Cramer said his faith in CEO Mark Zuckerberg was “not misplaced.”

Meta next reports earnings on July 27, with analysts still expecting $2.59 per share of profit on revenue of $29.7 billion. Meta stock is just $30 per share above its pandemic low of $150.

Do It Yourself

Unlike other cloud kings, which have multiple revenue streams and host other companies’ content, Meta applications are the exclusive users of its cloud. While the other cloud kings — Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) — have been hit by the tech wreck, Meta has been hit harder, because it lacks alternative revenue streams.

Despite the pressure, Meta invested nearly $20 billion in its cloud for the 12 months ending in March. It could afford this because it had over $57 billion in operating cash flow during 2021.

Meta announced last November it would put $29 billion to $34 billion into capital spending this year, much of it in artificial intelligence and machine learning software. The company re-branded from Facebook for the software push, looking to create a “metaverse” that can digitally recreate the real world. The rebranding announcement represented a high water mark for tech stocks, which have been falling ever since.

The problem is Meta’s advertising technology, whose power governments are seeking to rein in. A Senate bill would break its digital ad exchange. Europe’s Digital Markets Act places new obligations on “gatekeepers” like Meta, limiting how it can use data and making it easy for users to unsubscribe.

Despite the pounding FB stock has taken, and the pressure from governments, most analysts remain enamored of the stock. There are 36 following it at Tipranks, with only one seller and 26 buyers. The average one-year price target is $278.

Typical of the positive spin is a recent New York Times feature saying the cloud kings, which it calls “Big Tech,” have plenty of cash to invest through the business cycle and tie up government action in court for years. It noted, however, that Meta has instituted what it calls a “temporary hiring freeze” on some roles.

Bottom Line on FB Stock

Meta still has an ace in the hole.

That’s the developing world, where its free communication services remain vital for people who want to interact with global markets.

In other words, Meta has “First World Problems.” Governments in the developed world are threatening its cash flows, which came to $14 billion in the first quarter alone. So long as it can freely access Asian, African and Latin American markets, there’s a limit to the damage government can do.

The real danger is that global inflation sparks a global recession. If Meta can’t meet its $10 billion per quarter of investment commitments, the stock could fall still further.

On the date of publication, Dana Blankenhorn held long positions in AAPL, MSFT, GOOGL and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.