Here's What History Says Will Happen Next

Meta Platforms (NASDAQ: META) has faced several challenges over the past 12 months. Investors aren’t convinced that the company’s significant capex spending will pay off, and although its financial results have been strong, they often weren’t quite impressive enough to assuage those fears. Further, during the company’s first quarter, it posted a sequential decline in daily active users across its website and apps. Meta’s stock is down 4% this year, and the company has dipped 21% since the all-time high it hit late last year, as of writing.

However, this isn’t the first time Meta’s shares have dropped significantly on perceived weakness. And the way the company has responded in the past can give us a clue about what might come next.

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A clear trend emerges

Let’s take three cases with 20% or more declines. Between July 1 and Dec. 31, 2018, the stock fell by 32%. Meta Platforms (then called Facebook) faced several headwinds, including privacy concerns, a tarnished image, and unimpressive user growth. In fact, regulatory authorities investigated Meta’s privacy practices, especially its role in the Cambridge Analytica scandal.

Meta allowed a third party to collect personal data from millions of users without their explicit consent, which Cambridge Analytica then used for political advertising and voter targeting. Meta’s role in this debacle resulted in a $5 billion fine imposed by the U.S. Federal Trade Commission. These were clearly trying times for the tech leader, which is why its stock performance was terrible. Then, between mid-February 2020 and late March 2020, Meta’s shares dropped by 30%. Those were the early days of the pandemic when broader equities crashed. Meta Platforms did not escape the bloodbath.

Finally, between September 2021 and October 2022, the stock declined by 75%. Meta faced a more challenging advertising landscape due to Apple‘s iOS privacy changes, among other headwinds. How did Meta Platforms perform after those significant stock price declines? In each case, buying the company’s shares near the bottom — or even after a decline of about 20% — would have led to returns superior to those of the S&P 500 over the following few years. Take the company’s 2018 drop. Meta has crushed the market since.

META Total Return Level data by YCharts

Is this time different?

It’s also worth noting that one of Meta’s biggest concerns right now is something it has encountered before: significant spending on a project many investors fear will never yield a meaningful return on investment, or, at least, the kind that matches the spending levels we are seeing. That’s what happened when CEO Mark Zuckerberg decided to go all in on the metaverse. This initiative was a major letdown. How did Meta Platforms respond? The company declared 2023 its “year of efficiency.”

Meta Platforms aggressively cut costs, notably by laying off many employees. As a result, the tech giant kept its expenses in check throughout that year and posted strong earnings-per-share growth.

Meta then doubled down on artificial intelligence (AI), and the company’s efforts in that area have been a tremendous success. AI-powered algorithms are helping boost engagement on its apps, thereby improving its advertising business. Meta is also helping advertisers get more bang for their buck with various AI tools. What does all of this teach us about Meta Platforms? One important lesson is that, as long as the company has a massive user base — it currently boasts 3.56 billion daily active users — it can come up with many different ways to monetize its audience. They may not all be successful.

The metaverse wasn’t. But Meta has the luxury of trying many monetization schemes so long as at least some of them payoff. The company also has a strong competitive advantage due to network effects and switching costs, so it is likely to retain most of its users and remain the top player in the social media industry. Lastly, if AI initiatives don’t deliver returns that justify their investments, Meta can cut costs and switch to a new strategy, as it did when its metaverse efforts flopped. My view is that Meta Platforms is a strong buy after dropping by more than 20% from its most recent all-time high. Investors who get in today could see outstanding returns over the long run.

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Prosper Junior Bakiny has positions in Meta Platforms. The Motley Fool has positions in and recommends Apple and Meta Platforms. The Motley Fool has a disclosure policy.

Meta Platforms Is Down 21% From Its All-Time High: Here’s What History Says Will Happen Next was originally published by The Motley Fool

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