Investing Club: How we view Facebook parent Meta after the latest Fed comments

Published Tue, Apr 5 20224:27 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

We expect Meta Platforms (FB) to overcome its current competitive challenges. That's why we like the stock for the long term, even if our market outlook changed Tuesday. Our overall view on the market has become much more cautious in light of Federal Reserve Governor Lael Brainard's hawkish speech Tuesday . The central banker's view on inflation and tightening means we must get more conservative and protect ourselves from what could be more declines. We are worried about our high-multiple tech stocks like Nvidia (NVDA), Amazon (AMZN), and even Apple (AAPL) as we expect them to get hit by a selloff. We know that Advanced Micro Devices (AMD), Marvell Technology (MRVL), and Qualcomm (QCOM) are going to get hurt too, even as their multiples have come down significantly in the past months. Alphabet (GOOGL) and Meta are cheaper than others, and in the latter we remain believers in its ability to fend off competition and continue to grow in the social media space. Shares of the Facebook parent have had a terrible year, make no mistake. But we see a path for the stock to exit the doghouse for a few reasons — a mix of business fundamentals and valuation. We'll break them down below. Future of Reels Reels is a very important endeavor for Meta, and we're confident the company is on its way to optimizing the short-form video feature that launched in 2020 as a response to the soaring popularity of Gen Z fave TikTok. Reels showcases all sorts of brief videos from users, including comedic sketches, a musician playing an original song or a travel blogger making a montage of various places. You can scroll through Reels on a separate feed on the Instagram app. Last year, the company also brought Reels over to the legacy Facebook app in the U.S. As you scroll through Reels, you'll occasionally be shown a video that's really an advertisement. The most recent ad this reporter saw on Reels was from grocery delivery startup Getir, making the case for placing an order. These sponsored posts are the key to making money from Reels. In order to achieve meaningful monetization, people need to actually be using and watching Reels. That user engagement will, in turn, attract more advertisers to the platform. We understand CEO Mark Zuckerberg has made Reels a major priority inside the company, along with his more long-term vision of developing the so-called metaverse. On Tuesday's "Morning Meeting," Jim Cramer said he thinks the demand to have ads on Reels is "real and important." We're not alone in our belief that the short-form video product will gain traction with users and advertisers alike. Reels played a role in UBS analyst Lloyd Walmsley on Tuesday hiking his price target on Meta shares to $300 from $280. "While the timing is unclear, we think a ramp in Reels monetization, easing comps, and improvements in targeting/measurement can drive the multiple back towards its 3-year average of a ~9% premium to the S & P 500," the analyst wrote. Valuation Meta shares have been pummeled this year to the point where they're very inexpensive relative to where they've been historically. The stock is trading at 18.1 times forward earnings, as of Tuesday afternoon, compared with its five-year average of 23.5 times forward earnings, according to FactSet. On March 14, when Meta notched a 52-week low of $185.82 per share, the stock's multiple had gotten as low as 14.5. Even though it's recovered a little from there, it's still trades at a discount to the broader market. The S & P 500 traded at nearly 20 times forward earnings on Tuesday. (Jim Cramer's Charitable Trust is long AAPL, AMD, FB, MRVL, NVDA, QCOM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Small toy figures are seen in front of displayed Facebook's new rebrand logo Meta in this illustration taken, October 28, 2021.

Dado Ruvic | Reuters

We expect Meta Platforms (FB) to overcome its current competitive challenges. That's why we like the stock for the long term, even if our market outlook changed Tuesday.