A lot of the luster has come off of Meta Platforms (META) over the past year. Once a tech-star as the “F” in the FAANG stocks — from its years as Facebook — META has seen its shares lose some 60% of their value over the past 12 months. The stock took its latest leg down last week after posting disappointing second-quarter results. Meta had its first year-over-year revenue decline as a public company. The company also provided forward guidance that was lower than the consensus.
Macroeconomic factors were cited as the reason for the company’s tepid outlook. Meta Platforms also continues to be hit by direct response ads and brands as a result of Apple’s (AAPL) Identifier for Advertisers changes. Quarterly results triggered a wave of downward price targets from analyst firms and most now sit in the low $200s per share on META.
As Meta and as Facebook, it has always been known as a growth stock. That has changed temporarily as the stock sells at around 12-times trailing earnings. It is important to remember that profits are currently crimped and will fall this year as the company is investing massive amounts of funds building out the Metaverse, which is likely to pay dividends in the years ahead. Bloomberg recently projected the Metaverse could eventually be an $800 billion market. The company generated just over $450 million in revenues from this business in the quarter, a very small part of its over $28 billion in sales, but that will expand as a portion of overall revenues in time. The company also has opportunities to better monetize its Instagram business.
The company is flush with cash to continue to make acquisitions as needed and has no long-term debt. Growth at the traditional Facebook is obviously slowing down, and a recession could reduce advertising budgets. But the company is hardly going the way of My Space. It has some 3.6 billion users worldwide, 2.9 billion of which use one of its apps on a daily basis.
After an approximately 60% decline over the past year, a lot of bad news seems fully priced into the stock. But I could also see the shares being “dead money” until the Metaverse gains further traction and as the company navigates through a likely recession on the horizon. Therefore, the covered-call strategy outlined below provides significant downside mitigation while providing more than a decent return should the shares become rangebound during this transition.
For this trade, I am picking a strike price approximately 5% below the current trading level of the stock for a bit more risk mitigation. Using the March $150 call strikes, fashion a covered call order with a net debit in the $130 to $130.20 a share range (net stock price — option premium). This strategy provides approximately 18% of downside protection, as well as 15% of potential upside, even if the stock drifts down a bit over the option duration.