Meta Bulls Are Overvaluing Zuckerberg’s Vision
Investors may be viewing Meta Platforms’ stock through rose-tinted glasses.
The Takeaway
• Meta stock has outperformed most big tech stocks this year
• Meta is now trading at a big premium to Alphabet
• Bullish investors say they’re betting on CEO Mark Zuckerberg
Meta’s shares have soared over 70% this year, more than those of any other big tech stock except Nvidia, giving Meta a premium valuation next to comparable stocks such as Alphabet’s. Shares of the Facebook and Instagram parent now trade at 14.2 times next year’s expected earnings before interest, taxes, depreciation and amortization, compared to 12.3 for Alphabet, according to Koyfin data. In late August, both stocks were trading at around 12.6 times.
The rally doesn’t make much sense. Meta, like Alphabet and other big tech companies like Microsoft, is pouring tens of billions into generative artificial intelligence. Alphabet and Microsoft are both charging businesses for access to their AI technology through their cloud units. Meta doesn’t have that opportunity, and it’s unclear how it will make money from the new technology.
Investors may be trusting Zuckerberg’s long-term vision that high-tech mixed reality hardware such as glasses or headsets will eventually replace the smartphone. That’s a long term vision and the company faces a lot of near term risks.
To be sure, Meta is making progress in the new-fangled technology—but these are baby steps. Ray-Ban smart glasses, which allow people to make phone calls and take photos and which incorporate Meta’s AI assistant, is the best example of the progress. Meta has had trouble keeping up with the demand for the glasses, although their overall sales are tiny compared to other devices. IDC estimates Meta shipped just 700,000 pairs, a fraction of the 26 million Apple Watches shipped in the first nine months of last year.
Zuckerberg also won plaudits for his unveiling last month of an augmented reality glasses prototype called Orion that overlay digital information onto the user’s surroundings. Those glasses represent a big part of Zuckerberg’s efforts to extend Meta’s lead in mixed reality, which it has been building through its Quest headsets. But the Orion glasses are still years away from commercial release.
Meta’s Challenges
At the same time, investors are underestimating the risks Meta faces. For one thing, while it leads the market for smart glasses now, that may not last. Google is planning its own smart glasses in collaboration with Samsung. Apple has been reported to be working on a version of smart glasses. And given Apple’s brand name and strength in consumer marketing, the company would likely pose a serious threat to Meta if it jumps into the smart glasses market.
Moreover, the expansion of the technology in smart glasses and virtual reality is enormously expensive. Both areas are part of Meta’s Reality Labs unit, which has lost roughly $60 billion cumulatively since 2019. Even if Meta’s smart glasses and VR headsets continue to sell well, there’s no guarantee the company will earn a decent return on its investment.
Abdullah Al-Rezwan, founder of equity research provider MBI Deep Dives, says that Meta accounts for nearly a third of his investment portfolio. But he says he wouldn’t buy more shares at the current price, citing “shades of concern” lurking for the company such as losses at Reality Labs.
Another set of issues he worries about are the antitrust enforcement threats facing Meta from regulators across the globe, including in the U.S. and Europe, that if successful could bring enormous consequences—such as a forced divestiture of Instagram or WhatsApp.
Al-Rezwan doesn’t mention yet another risk: the growing pressure on social media firms from lawmakers, regulators and parents to protect children and young people on the platforms from a variety of dangers. Meta faces a flood of lawsuits over those issues, as well as a growing number of state laws requiring it to take stronger action.
The company has gradually tightened controls over how children under 16 can use Instagram. The business risk is that these restrictions could deter young people from using its apps in the long term, and in the short term they could reduce the amount of time youth spend on the app, which advertisers might see as a negative.
Perhaps the biggest question mark for Meta is whether it can earn a return from the massive bet that generative AI will turbocharge its business. Meta is spending a small fortune to build out the computing infrastructure needed to run AI models. Meta Chief Financial Officer Susan Li told investors on an earnings call in July that the company expects that outlay, which it projects will be as large as $40 billion in 2024, to increase in 2025 to support further AI research and product development.
Meta bulls think the company will eventually take market share away from Alphabet in digital advertising by luring users away from Google search and to Meta’s chatbots.
“I think excitement is forming, or at least for some investors like myself, that Meta can get more of the Google pie in a way, because [with Meta AI] you have high-intent searches, which Meta normally didn’t have [before] because people were mostly just scrolling through content” on its apps, said Rihard Jarc, chief investment officer of New Era Funds.
It may not be that simple, though: Google is racing to defend its turf, and has recently started incorporating ads into some of the AI-generated summaries that now show up in response to searches conducted on its website.
Jarc is also bullish about Meta’s mixed reality prospects. Jarc reckons that Meta debuted the Orion glasses recently with the intention to signal to investors that it had an impressive product to show for its massive spending, one “we haven’t seen in the last 10 or 20 years.”
Assuming a version of Orion eventually becomes available for purchase, Meta might have a chance to control the main computing platform of the next generation, as long as people ultimately buy into the idea of using wearable devices and glasses instead of phones. But it’s far too early to know whether that world is really coming.
Even some Meta bulls aren’t too sure about that argument. As Al-Rezwan put it, “The reality is, Meta’s business is built on Apple's platform and will continue to be built on Apple platform for the foreseeable future, if not for forever.”
In the meantime, investors looking to buy Meta shares need to have complete faith that Zuckerberg’s bold swing will end up landing. In the absence of many concrete results to tout, his storytelling abilities and skillfully articulated vision have certainly helped set him apart.
