Is Meta Platforms' Business in Trouble?

Meta Platforms (NASDAQ: META), the social media giant that owns Facebook, Instagram, and WhatsApp, has been a growth beast in recent years. Its revenue is growing at a fast pace, and the stock is soaring. Since the start of 2023, the stock price is up 431%.

But past performance, as they say, is no guarantee of future performance. Could there be trouble ahead for the company? A recent report from The Wall Street Journal discussed some significant shortcomings in Meta's business, which it says could make Meta vulnerable to regulatory pressures in the future.

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Here's what you need to know if you're thinking about buying Meta Platforms' stock today.

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A hub for internet fraud?

According to the Journal's May 15 report, documents revealed that Meta Platforms "accounted for nearly half of all reported scams on Zelle for JPMorgan Chase [account holders] between the summers of 2023 and 2024." And regulators in Britain and Australia were also seeing similar patterns.

However, those still weren't the most mind-boggling numbers from the reporting. Incredibly, an estimated 70% of new advertisers on the platform, the report said, were found to be promoting scams or selling illegal or low-quality products. And in some cases, it could take 32 strikes before an account might get banned from the platform.

Meta has developed a reputation for having problems related to misinformation circulating on its platforms for years, but these new reports arguably take things to a new level. My concern is that a lot of the company's revenue growth may be due to having lax policies, and that makes its platforms hubs for scammers.

According to The Wall Street Journal, a spokesperson from Meta said the company is working the fix the issues being raised and has issued warnings to users to be wary, but it has also argued in court cases about whether it should be held liable that it has no legal responsibility to make fixes. While the company talks about improving its practices, the report's findings don't suggest it's doing nearly enough.

Without a strong growth rate, the stock could be vulnerable

In 2023, when shares of Meta were picking up steam, its growth rate was accelerating and was on a much more positive trajectory than in 2022, when companies were scaling back on ad spend. But if that strong growth was due to having loose rules around ads, that poses big question marks about what its growth rate might really be if it were to take a much tougher stance.

Data by YCharts.

Meta's growth rate has already begun to slow down in recent quarters, and the risk is that more of a slowdown may be inevitable. Regardless of whether it tightens up its policies or not, adverse macroeconomic conditions could weigh on its operations. Chinese retailers are already looking to cut back on ad spending this year due to tariffs, and that could impact Meta's advertising business to the tune of $7 billion, according to an estimate from MoffettNathanson.

If the company does put tougher policies in place, or is forced to do so through greater government oversight, that could make a bad situation even worse for Meta.

Should you avoid Meta Platforms stock?

Meta Platforms' stock looks relatively cheap based on current estimates, trading at 24 times its trailing earnings, but that multiple could look far different if the company has to take a tougher stance on policing its ads. It also faces the risk of a possible breakup due to antitrust issues, where it may need to sell off Instagram and/or WhatsApp, two of its more popular social media applications, especially when it comes to younger audiences.

Year to date, the stock is up around 9.3%, but it is down about 13% from its 52-week high. Between a slowing growth rate, a possible breakup of its business, and a questionable business model, there are a flurry of reasons to avoid the tech stock right now. While Meta has been doing well in recent years, this is a stock I'd stay away from as I have serious doubts about its long-term growth potential.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase and Meta Platforms. The Motley Fool has a disclosure policy.