One of the most striking signs of how recent events have reshuffled investors’ expectations is that the owner of tech giant Facebook is now carrying a lower valuation than a purveyor of old-fashioned cancer sticks.
Shares of Meta Platforms Inc., as Facebook’s parent is now known, have plunged following a disappointing earnings report in early February. They now trade for a mere 14 times their earnings over the past year.
Philip Morris International Inc., which peddles Marlboro cigarettes, has faced its own challenges, and its shares have also dropped, but far less than Meta’s. They now sell for 16 times trailing earnings.
What makes this comparison particularly interesting is that both companies are in the business of dispensing addictive commodities – social media in the case of Meta, nicotine in the case of Philip Morris. Catering to these cravings has historically produced big profits for both Meta and Philip Morris.
But which addictive business would you rather own part of right now? That is a tricky question to answer.
The problem with addictive businesses is that they tend to saturate their markets relatively quickly. They also invite competition and regulatory retaliation.
For Philip Morris, these challenges are old news. For Meta, though, they are newer and therefore potentially more troublesome.
The challenges certainly came as a shock to investors back on Feb. 2, when Meta published its earnings report. It surprised the market by admitting it was feeling the cold chill of competition. Its shares promptly fell 26 per cent, wiping more than US$230-billion from the company’s market value.
Meta warned the current quarter would be its slowest period of growth since it went public in 2012. It said it was facing increasing competition from the video app TikTok. It also reported that, for the first time, the number of daily active users across its apps had declined slightly from the previous quarter.
Among the biggest challenges facing Meta are changes that Apple Inc. introduced to its software last year that give users the option not to be tracked by apps. Apple’s enhanced privacy controls have delivered a stinging blow to Facebook’s core business of delivering targeted advertising to users based upon their browsing histories.
Meta has responded by talking up its vision of a future based around the metaverse, an online virtual reality populated by avatars. For now, though, Meta’s attempts to construct that online world are chewing up cash. They evoke painful memories of Meta’s most recent big idea – a failed effort to build a global digital currency.
Regulators aren’t showing much sympathy for the company’s plight. European authorities are opening an antitrust probe into alleged collusion between Meta and Alphabet Inc.’s Google to increase their dominance of online advertising. Texas is suing Meta over its facial recognition system. Russia has banned both Meta’s Facebook and Instagram apps.
Remarkably, none of this has dented analysts’ enthusiasm for the stock. The vast majority – 43 out of 61 – still label it a “buy” or “outperform” stock, according to Refinitiv. Its fair value is US$400 a share, about double its current price, Morningstar researchers figure. Betting on a rebound therefore sounds tempting – if you are prepared to take a leap of faith on the metaverse.
But what Meta has in potential, Philip Morris has in current payoff. At current prices, it delivers a 5.4-per-cent dividend yield. Which means it pays 5.4 per cent more than Meta’s non-existent dividend.
To be sure, Philip Morris is a slow-growth business at best. Its core business of selling cigarettes and other nicotine-dispensing gadgets in markets outside the United States is facing well-deserved challenges from health authorities. It is also confronting the potential loss of its business in Russia owing to falling incomes and possible sanctions against Western products. That would be a nasty blow since Eastern Europe accounted for about 9 per cent of its revenues in 2021.
But the company is striving to reshape itself. About a third of its revenue now comes from non-combustible smoking alternatives such as IQOS, a device that heats, rather than burns, tobacco.
It recently bought Vectura Group PLC, a British pharmaceutical company that makes asthma inhalers, as well as Fertin Pharma, a Danish maker of medical chewing gum. It aims to have smoke-free products account for more than 50 per cent of its total net revenues by 2025.
So would you rather invest in Meta or in Philip Morris? Both are companies that have long hooked their users with addictive products. Both are now under stress, trying to reinvent themselves in the face of changing technology and social trends.
The key difference may be that Philip Morris’s reinvention plan doesn’t hinge on a mass turn to an uncertain technological future. As odd as it sounds, it may now be more attractive to bet on the fading allure of nicotine than on the next twist in social media.
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Ian McGugan