Meta Platforms stock jumps 20% overnight — is FB a value trap?

YEREVAN (CoinChapter.com) – Meta Platforms Inc., formerly known as Facebook, added 7% to its revenue year-over-year in Q1, according to the latest earnings report. In response to the data release, the company’s stock (NASDAQ: FB) traded at $205 in the European session on Apr. 29, after bottoming out at a two-year low of $169 on Wednesday.

Also read: Meta stock (FB) oversold bounce couldn’t erase Q1 losses — what’s ahead?

Financial analyst Alex Ponte warned traders that the price jump might not cancel out ‘value trap’ concerns. Thus, he urged potential investors to exercise caution.

In detail, a value trap is a stock or other investment that trades at a historically low valuation, luring buyers into a seemingly good bargain. The danger of a value trap presents itself when the stock continues to languish or drop further after an investor buys into the company.

Here are three reasons why it might be too early to buy into Meta (FB).

#1 Meta’s stock-based compensation

Ponte investigated Meta’s share repurchase history, concluding that the repurchases have historically created minimal value for their shareholders and primarily been used to offset their staff’s equity dilution.

Meta Platforms had bought $91 billion worth of stock between 2012 and 2021. However, despite this massive share repurchase, the company’s total shares outstanding had increased at a compound annual growth rate of 3% during that same period.

Also read: 77% of U.S. consumers pick blockchain over Facebook-owned metaverse — study.

Ponte counted that approximately 42% of all repurchases were used to offset the dilution created through stock-based compensation. In detail, stock-based compensation is the practice of rewarding employees, executives, and directors of a company with equity in the business.

The analyst asserted that the strategy “puts a sour taste in the mouth” if one is a long-term investor.

#2 Employee growth over revenue growth

Another concern is Meta’s trend of employee growth exceeding revenue growth. This imbalance has proven to harm the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization).

The chart below shows the correlation between the three factors. Additionally, it illustrates that the EBITDA grew in periods when the revenue growth prevailed over employee growth. The inverse correlation appears logical, considering that wages are Meta’s largest expense category.

Also read:  What Facebook effect? Metaverse tokens log middle-finger rallies against Meta’s falling stock value.

As the trend continues through the current quarter, Ponte pointed out that comparing total employee and revenue growth could become a “precursor for underperforming annual EPS growth.”

#3 Risks of strong US dollar

Meta Platforms’ product counts millions of users globally. Thus, its revenue and, by extension, FB stock value appreciation depend heavily on a whole basket of currencies. Moreover, in 2021 around 60% of the company’s revenue logged in from outside the United States.

In detail, since the Federal Reserve implemented hawkish fiscal policies to fight the growing inflation, dollar strength (broad dollar, or dollar index) grew compared to other currencies worldwide.

As far as Meta and FB are concerned, the growing broad dollar might hinder the company’s international revenue growth. Moreover, the Euro and Japanese Yen have depreciated by 9% and 12% in the previous six months, respectively, against the dollar.

Also read: U.S. GDP drops 1.4% in Q1 2022 in latest evidence of recession prospects.

The reasons above warn against purchasing FB shares just yet. But the stock’s metrics point to a short-term appreciation. Nonetheless, these other decisions concerning stock purchase should stem from each trader’s timeframe expectations.