Why Fortescue shares could be facing a Meta-like problem

Fortescue Metals Group Limited (ASX: FMG) shares are taking the conveyor belt lower today after a cracking start to the year.

As we enter mid-afternoon trading, investors in one of Australia’s biggest iron ore producers are taking their foot off the gas pedal. In a subdued start to the week, the company’s share price is down 0.58% to $22.47. Meanwhile, the S&P/ASX 200 Index (ASX: XJO) is faring slightly better, with a minor gain of 0.03% so far today.

The negative move comes after the completion of the annual World Economic Forum event held in Davos, Switzerland, where climate change was once again a topical point of discussion. Fortescue founder and executive chair Andrew Forrest attended the event spruiking the efforts of Fortescue Future Industries (FFI), starting from around 25:30 in the clip below.

However, one portfolio manager believes the green hydrogen business could be a red flag for Fortescue shares.

Rock digging and reinvention

Aside from being industry giants, it’s hard to see much resemblance between Fortescue and Facebook-owner Meta Platforms Inc (NASDAQ: META). However, Ben McGarry of Sydney-based Totus Capital thinks there might be a worrying similarity between the two.

Speaking to the Australian Financial Review, McGarry revealed the funds’ short positioning in Fortescue Metals shares. Delving into the reasoning, he highlighted how the expensive FFI venture of the Forrest-led miner was uncanny to Meta’s cash-incinerating metaverse hopes.

The worry stems from Fortescue’s plan to tip 10% of its net profit after tax (NPAT) into the green dream. For FY22, that would work out to be approximately US$620 million.

It’s a large sum of money to be burning on undeveloped technology, especially in a cyclic industry such as resources. However, Andrew Forrest believes the company could save around $1 billion annually by running its iron ore operations on green hydrogen.

Likewise, Meta has chewed through enormous capital as it searches for a new growth engine in virtual and augmented reality. Since 2021, Mark Zuckerberg’s pet project has gobbled up US$15 billion.

The rampant spending at Meta comes at a time when revenue growth is declining, as shown below.

Clearly, McGarry and the Totus team are worried that Fortescue might similarly be spending good money after bad.

Are Fortescue shares cheap?

If you’re thinking like a contrarian, you might ask yourself if Fortescue shares are ‘cheap’ now.

The Australian mining giant currently trades on a price-to-earnings (P/E) ratio of around 7.8 times earnings. This is mostly on par with its peers, such as BHP Group Limited (ASX: BHP) and Rio Tinto Ltd (ASX: RIO).

It’s worth noting that Fortescues’ earnings are forecast to decline in FY23 and FY24. According to estimates, earnings per share (EPS) could be 45% less in FY24 than in FY22.

All else being equal, that would push the P/E ratio up 45% to around 11.3 times — roughly in line with the industry average.

The post Why Fortescue shares could be facing a Meta-like problem appeared first on The Motley Fool Australia.

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More reading

• Should I buy ASX mining shares now or not?
• My top predictions for ASX 200 mining shares in 2023
• 3 high-yield ASX shares I think are dividend traps right now
• My Fortescue shares are up 30% in 3 months. Should I buy more?
• Fortescue shares: 4 reasons to buy (and not buy) in 2023

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. Motley Fool contributor Mitchell Lawler has positions in Meta Platforms. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Meta Platforms. The Motley Fool Australia has recommended Meta Platforms. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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