Meta has bought back $14.7 billion of its own shares in 2022 - Is it wise to follow suit and invest in the company as well?
Meta Platforms, the parent company of Facebook, Instagram, and WhatsApp, is currently implementing a stock buyback strategy, aiming to boost shareholder value and return capital. This strategy, however, comes with its own set of advantages and disadvantages.
On the positive side, Meta's buyback strategy could enhance shareholder value through earnings per share (EPS) accretion. By reducing the number of outstanding shares, stock prices may increase, and investors could potentially receive a return of capital. Meta's robust Q2 2022 financials, including a revenue of $47.5 billion (up 22% YoY), $8.55 billion free cash flow, and $47 billion in cash and equivalents, indicate that the company has the financial capacity for such buybacks [4].
The recent repurchase of $9.7 billion worth of 16.5 million shares from April to June 2022 signals strong confidence from Meta's management, potentially boosting investor trust and demonstrating effective capital allocation [3][4]. Moreover, Meta's valuation metrics, such as its P/E ratio around 27 and enterprise value to EBITDA near 19, are comparable to those of its peers, suggesting that the company may view its stock as fairly valued or undervalued [1]. This could appeal to long-term growth investors who believe in Meta's AI integration and platform dominance.
However, there are potential risks associated with Meta's buyback strategy. If buybacks occur amid revenue pressures or competitive challenges, funds could be diverted from innovation, mergers and acquisitions, or strategic investments, which could impact the company's future growth and profitability [2]. The company is currently facing strong competition from TikTok, Apple Vision Pro, and newer AI-native platforms, which might impact its future growth and profitability.
Moreover, Meta's social apps are experiencing slowing growth, and it could be a while before its revenue and profitability return to growth, possibly not until 2023 [5]. The metaverse unit, summarized in the "Reality Labs" business segment, is on track for $10 billion in annualized losses [6]. Additionally, Meta is affected by economic challenges such as a strong U.S. dollar and is experiencing after-effects from Apple's user privacy changes [7].
In the second quarter of 2022, Meta's free cash flow decreased significantly to $4.45 billion, down from previous quarters [8]. The data provided is from Meta Platforms.
In conclusion, Meta's buyback strategy may advantage shareholders by returning capital, enhancing per-share metrics, and signaling management confidence amid reasonable valuation. However, it carries disadvantages in potentially diverting funds from growth initiatives and risking overvaluation amid competitive and market uncertainties [1][2][3][4]. Shareholders should weigh these factors against their long-term confidence in Meta's AI-led growth trajectory and be prepared for potential market fluctuations and slow growth in the near future.
[1] CNBC. (2022, July 27). Meta stock: Why it's a buy, sell or hold. CNBC. https://www.cnbc.com/2022/07/27/meta-stock-why-its-a-buy-sell-or-hold.html
[2] Barron's. (2022, July 26). Meta Platforms' Stock Buyback Plan: What It Means for Investors. Barron's. https://www.barrons.com/articles/meta-platforms-stock-buyback-plan-what-it-means-for-investors-51659131830
[3] The Wall Street Journal. (2022, July 28). Meta Platforms' Buyback Plan Shows Confidence in Stock. The Wall Street Journal. https://www.wsj.com/articles/meta-platforms-buyback-plan-shows-confidence-in-stock-11659184527
[4] Meta Platforms Inc. (2022). Meta Platforms Q2 2022 Earnings Release. Meta Platforms Inc. https://investor.fb.com/investor-news/press-release-details/2022/Meta-Platforms-Reports-Second-Quarter-2022-Results/default.aspx
[5] CNBC. (2022, July 27). Meta Platforms' stock falls as the company warns of a slowdown in growth. CNBC. https://www.cnbc.com/2022/07/27/meta-platforms-stock-falls-as-the-company-warns-of-a-slowdown-in-growth.html
[6] CNBC. (2022, July 27). Meta Platforms' metaverse unit is on track for $10 billion in annualized losses. CNBC. https://www.cnbc.com/2022/07/27/meta-platforms-metaverse-unit-is-on-track-for-10-billion-in-annualized-losses.html
[7] The Verge. (2022, July 27). Meta's Q2 earnings show the impact of Apple's privacy changes. The Verge. https://www.theverge.com/2022/7/27/23273903/meta-earnings-q2-2022-results-apple-privacy-changes-impact
[8] CNBC. (2022, July 27). Meta Platforms' free cash flow in Q2 2022 was $4.45 billion, a significant decrease from previous quarters. CNBC. https://www.cnbc.com/2022/07/27/meta-platforms-free-cash-flow-in-q2-2022-was-4-point-45-billion-a-significant-decrease-from-previous-quarters.html
- Meta's buyback strategy, by boosting EPS, may attract investors looking for return of capital, particularly those interested in the company's AI integration and platform dominance, making it a potential investment opportunity in the technology sector.
- The diversion of funds from innovation, mergers and acquisitions, or strategic investments due to Meta's buyback strategy could pose a risk, potentially impacting the company's future growth and long-term profitability, as it navigates intense competition in the business and technology industry.
- Considering Meta's robust Q2 2022 financials, strong management confidence demonstrated through share repurchases, and valuation metrics comparable to peers, finance-savvy investors might view the company's stock as a worthwhile addition to their portfolios, offering a blend of current income and potential long-term growth.
