Want proof that investors have short memories? Just look at the stock of Meta Platforms (META -2.95%). This year, it's one of the hottest companies in the market, rising by 45% after already climbing 194% in 2023. But in 2022, it was in a brutal tailspin, losing 64% of its value as many investors were convinced it was going to continue going lower.
Such is the investing world these days where fear can convince investors that a stock is headed for zero, and a new trend in tech can set its trajectory back toward the moon the next day. The truth, as is usually the case, lies somewhere in the middle. Meta isn't the do-no-wrong stock it is today, nor was it the complete and utter failure that it looked like in 2022.
Still, the stock's elevated $1.3 trillion valuation makes it overdue for a sell-off. Here are three reasons to avoid Meta stock right now.
1. Meta could be facing some serious regulatory headwinds
Various governments are starting to scrutinize social media much closer as parents and the general public grow concerned its potential adverse effects on young kids. The U.S. Surgeon General this month called for a warning label on social media platforms because of their mental health risks.
New York's Gov. Kathy Hochul recently signed legislation called the SAFE for Kids Act (with SAFE standing for Stop Addictive Feeds Exploitation). The law looks to prevent apps from sending notifications between midnight and 6 a.m. The companies behind them might also need to adjust their algorithms so that users under the age of 18 are not seeing so-called "addictive feeds."
More scrutiny is also being paid to so-called fake news, to mental health issues, and to other issues deemed to be destructive to users of social media. And when the term social media is used, many people's first thoughts go to popular apps like Meta's Instagram and Facebook. If regulators start coming down hard on social media companies by imposing bans, fines, or restrictions, Meta is likely to be among the hardest hit.
While it might be difficult to quantify just what that could mean for its growth prospects or profitability, it's a risk investors should factor into their analysis.
2. Meta's price rally is partially attributed a potential TikTok ban
One social media company that regulators have already come down on hard is ByteDance's TikTok. In this case, the repercussions could be significant: an outright ban on the app in the U.S. unless China-based ByteDance sells TikTok to a non-Chinese owner.
By April 2025, the app could be banned, effectively removing what is arguably Facebook's and Instagram's most serious competitor. But a lot needs to happen in the meantime. A deal to sell could be reached. The ban is being challenged in court and the government could lose. A potential new president in the White House could affect government actions. Policies might change as well.
Meta stock has undoubtedly seen some upside related to the prospects of a TikTok ban. This brings to light a more concerning issue for the company: It is vulnerable to serious competition, and it might not have as secure a moat as investors could be pricing into the valuation. The company's apps might not be as solid as they looked before TikTok emerged as a viable threat.
3. Meta Platforms hasn't been good at innovating
I'm not sold on Meta as a good growth stock because its go-to move is often to copy features from competitors. Coming out with new and innovative features just hasn't been Meta's strength over the years.
When Snap attracted many users to its Snapchat platform, Meta copied some of the best features, including adding image modification effects and creating Facebook Stories. Other examples include Instagram rolling out Reels to combat TikTok, and its introduction last year of Threads, which is for text updates similar to X (formerly Twitter).
The one area where Meta is trying to innovate on its own is the metaverse, to the point where it even rebranded and changed its official name from Facebook in 2021. The metaverse has proved to be a costly venture and it is not producing enough revenue to cover its very high expenses. Through the first three months of the year, Meta reported losses totaling $3.8 billion on its Reality Labs segment, which includes its metaverse-related spending. That loss is only slightly less than the $4 billion loss it incurred in the prior-year period. With revenue of just $440 million from that segment of its business, it is nowhere near getting to break even anytime soon.
If not for the massive $17.7 billion operating profit from its core Family of Apps segment this past quarter (which includes Instagram, Facebook, WhatsApp, and Messenger), investors would likely be much less forgiving about Reality Labs' losses.
Meta has been good at copying features but not so much in actually developing and growing its own business. And that's a concern, especially as it piles more money into the metaverse.
There are better growth stocks out there than Meta
Meta Platforms stock has been doing well since 2023, but this is not as good a growth stock as it might seem. The company benefits from the prospects of a TikTok ban and from copying features from rivals.
With plenty of potential headwinds in the future and a questionable growth strategy, this is not the type of growth stock I would be putting my investment dollars in. There are many better stocks to buy for the long haul.
