Meta Platforms (META 2.33%) and Nvidia (NVDA 3.46%) both seemed like unstoppable growth stocks in 2021. After the initial COVID lockdowns, a surge in advertising growth drove Meta's stock to an all-time high of $382.18 last September. Nvidia stock peaked around the same time, reaching $333.76 in November 2021 as the chipmaker dazzled investors with robust sales of gaming and data center GPUs.
February brought that growth to a grinding halt for both companies, badly burning investors who had chased earlier rallies. After mixed fourth-quarter earnings and weak guidance in the year ahead due to its shifting business model, Meta stock now sits near $200. Nvidia stock has similarly stumbled, dipping to the mid $240s amid concerns about decelerating growth, peaking gross margins, and the ongoing chip shortage. Nvidia's plan to buy Arm Holdings and become a chip design powerhouse failed, disappointing investors.
Should investors take the contrarian view and jump on opportunities to buy either tech stock at a steep discount? Let's take a fresh look at both companies to decide.
Image source: Getty Images.
What happened to Meta?
Recent years have been good to Meta. While its advertising business struggled at the onset of the pandemic, the company bounced back in the second half of the year, with revenue rising 22% to $85.97 billion in 2020. That same year, Meta expanded operating margins by four percentage points to 38% and increased earnings per share (EPS) by 57% year over year.
Meta had good fortune in 2021 too: revenue increased 37% to $117.93 billion as businesses continued ramping back up ad spending. Following 2020's trend, Meta's operating margin expanded to 40% and EPS jumped 36%.
Those past numbers look fantastic, but Meta anticipates a slowdown in 2022. The company expects revenue in the first quarter of 2022 to represent 3% to 11% year-over-year growth. Meta primarily blames this halt on Apple's (AAPL 5.98%) iOS privacy update, which enables users to opt-out of data-tracking features. The company also anticipates increased competition from short video apps like ByteDance's TikTok.
To keep pace with TikTok, Meta plans to prioritize short video content on Facebook and Instagram Reels. That shift, though, will throttle near-term revenue and earnings growth as videos are difficult to monetize. Meta also plans to pour more cash into its unprofitable Reality Labs division, which focuses on virtual reality and the metaverse. This segment may prove promising in the future, but it's currently burning money: in 2021, Reality Labs racked up an operating loss of $10.1 billion while generating just $2.27 billion in revenue.
Investors are spooked by this combination of slow growth and high spending. Meta's sliding stock price reflects analyst expectations that company revenue will grow just 12% this year while earnings slide 10%. The future, though, isn't all bleak: assuming Meta overcomes near-term challenges, analysts expect revenue and earnings alike to rise about 17% in 2023.
What happened to Nvidia?
Pandemic trends proved a boon for Nvidia: in fiscal year 2021, (ended January 2021), revenue surged 53% to $16.68 billion. Sales of gaming GPUs jumped as people played more video games while stuck at home. Demand for cloud services increased as people worked from home, streamed media, and played video games, causing data centers to purchase more high-end GPUs to process AI and machine learning tasks.
It's no surprise then that Nvidia's adjusted gross margin expanded from 62.5% to 65.6% over its 2021 fiscal year, with its adjusted EPS soaring 73%.
The following year, Nvidia's revenue continued to grow, hitting $24.91 billion by the end of January. What's more, adjusted gross margin rose to 66.8% and adjusted EPS grew by 78%. Again, gaming and data center GPUs did most of the heavy lifting. Competitors could barely keep up: according to JPR, during the fourth quarter of 2021, Nvidia controlled 81% of the discrete GPU market, while its rival AMD (AMD 3.04%) held a 19% share.
Those growth rates are surely solid, but analysts expect Nvidia's revenue and earnings to slow this year as the market's appetite for new gaming and data center GPUs wanes. Predictions have the company growing revenue by 29% and earnings by 26%. Looking ahead to fiscal year 2024, analysts expect Nvidia's revenue and earnings to decelerate further, growing just 17% and 20% respectively as the upgrade cycle continues to cool.
Other unpredictable headwinds await on the horizon and could impact growth. Intel (INTC 1.28%) is launching new discrete GPUs to compete against Nvidia and AMD, which is sure to bite into both companies' market share. The use of Nvidia's gaming GPUs to mine cryptocurrencies could pin the company's growth on the volatile crypto market. The ongoing chip shortage threatens to cap Nvidia's supply of available chips.
The valuations and verdict
Bearing this in mind, which bargain stock is the better buy? Examining valuation offers insight into which company currently offers the most bang for your buck. Meta trades at just 16 times forward earnings, making it the cheapest FAANG stock by a wide margin. Despite its recent dip, Nvidia is still one of the priciest semiconductor stocks, trading at 44 times forward earnings.
Both of these companies are solid long-term investments, but I believe that Meta's discount valuation and less cyclical business model make it a more compelling investment than Nvidia. Nvidia is still growing at a healthy clip, but its high valuation will hamper possible returns.
