Meta's low prices are becoming a trap.

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Meta's stock price looks very cheap, but this very “cheapness” may itself be a warning sign.

Shares of Meta Platforms have been sluggish recently, with its price-to-earnings ratio dropping to its lowest level in nearly three years. On the surface, the company’s ad business is still growing rapidly; but behind these impressive figures, issues like stagnant user growth, runaway spending, and single business structure are accumulating.

Meta's current forward P/E ratio is about 18, not only lower than other major tech companies, but the valuation gap with Google’s parent company Alphabet has also widened to its highest level since 2022.

Shining ad business, but the ceiling is emerging

In the first quarter, Meta’s revenue grew by 33% year on year—a remarkable figure for a company of this size.

AI is the core driver of this round of growth. Meta uses AI to push more precise content to users, boosting ad click rates and conversion rates. In Q1, conversion rates after ad clicks increased by 6%, with ad prices also rising simultaneously. According to the latest reports by The Wall Street Journal, Meta is arguably the most successful among large tech companies in leveraging AI to boost ad sales.

But the problem lies with users.

In the first quarter, Meta’s Facebook, Instagram, WhatsApp, and Messenger had more than 3.5 billion daily active users, up 4% year on year. However, the number of users declined quarter-on-quarter—something that hasn’t happened since Meta started disclosing this metric in 2019.

Without continuous user growth, AI’s boost to the ad business will ultimately face its upper limit.

No “Plan B”

A bigger concern is that Meta has almost no businesses outside of advertising.

Amazon has cloud computing and e-commerce, Microsoft has enterprise software, Google has cloud business—if the ad market faces headwinds, these companies have cushions. Meta does not.

AI smart glasses are Meta’s fastest growing non-ad business at the moment, but reports point out that this product is unlikely to replace smartphones or bring a significant jump in revenue in the short term. Zuckerberg’s other attempts—video calling devices and VR headsets—have mostly ended in failure.

Runaway spending, surging debt

After Meta’s financial report released last week, its stock price plunged, triggered by the company raising this year’s capital expenditure plan by around $10 billion, bringing it to about $135 billion.

At the same time, Meta is heavily borrowing. By the end of the first quarter, the company’s long-term debt exceeded $57 billion, while at the end of 2022 when the AI boom started, that number was about $10 billion. This does not include the $25 billion bond issue just last week, nor the off-balance sheet financing tool being used to build a $27 billion data center in Louisiana.

New Street Research analyst Pierre Ferragu pointed out this contradiction directly in a recent report: according to his analysis, Meta’s projected cash spending growth this year significantly outpaces its revenue growth. His conclusion: “Meta’s spending is beyond what it can afford.”

Lagging in the AI race, stacking legal risks

In the AI model race, Meta’s situation is also not optimistic.

Last month, Meta released a new AI model called Muse Spark, making direct competition with Google, Anthropic, and OpenAI. But behind this are huge investments and several adjustments to the company’s AI strategy. Reports suggest Meta is still lagging its competitors in this race.

Legal pressures are also mounting. Australia legislated last December to ban under-16s from using social media; U.S. courts have recently ruled against Meta in successive cases involving social media addiction and harm to minors, which is expected to spark more litigation. These risks are hard to quantify but could have a substantial impact on Meta’s business and user growth.

Analysis points out that while market sentiment may be volatile, the reasons to question Meta’s outlook are real—even if its stock price appears at a historic low.

Risk warnings and disclaimerThe market involves risks, and investments require caution. This article does not constitute personal investment advice, nor does it take into account any individual user's particular investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. Investing based on this, you do so at your own risk. ```