Meta Platforms: A Steal at $160?
The company formerly known as Facebook is no longer being priced like it hit a bump in the road, but more like it drove head-first off a cliff
This has not been Meta’s year.
2022 got off to a rocky start for Mark Zuckerberg and co. with the February revelation that formerly bulletproof Facebook suffered a loss in monthly active users for the first time in forever — a problem made all the worse by Apple’s iOS privacy crackdown hitting the social media giant’s bottom line much harder than expected.
Add in the ominous rise of TikTok, COO Sheryl Sandberg’s impending departure, and the broader bear market and it’s little surprise that Meta’s market cap has been cut in half over the past five months.
Oh, and Wall Street openly doubting (and mocking) the company’s expensive fixation on the metaverse.
Last week alone, Meta got buried under a fresh avalanche of bad press:
A leaked internal memo from chief product officer Chris Cox painted a most pessimistic picture of the company’s short-term prospects: “I have to underscore that we are in serious times here and the headwinds are fierce. We need to execute flawlessly in an environment of slower growth, where teams should not expect vast influxes of new engineers and budgets.”
Zuckerberg struck a similarly downbeat note during Meta’s weekly Q&A session for employees: “If I had to bet, I’d say that this might be one of the worst downturns that we’ve seen in recent history.”
Analyst sentiment grew more bearish, too, with Dan Ives of Wedbush Securities predicting a “tornado-like quarter” for Meta.
Clearly, all is not well in Zuck-land.
But do these “fierce headwinds” really justify Meta’s price collapse from $384 to $160?
Doesn’t it seem a little crazy that this titan of digital advertising and social media trades at just 12x earnings and 10x free cash flow?
Remember, it’s in these moments of unforeseen turmoil (and deep unpopularity) that the intelligent investor can build generational wealth.
Meta Platforms, selling at $160, deserves a closer look.
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💰 Financial Fortress. Let’s not throw the baby out with the bathwater here: Meta remains a profit-gushing powerhouse.
A still-growing powerhouse, I might add.
Albeit at a slower pace than before.
In Q1 2022, Meta increased revenue to $27.9 billion (up 7%) and recorded $8.5 billion of profit. Numbers most companies would kill for, by the way, but considered disappointing here only because of Meta’s rocket-like trajectory over the past decade.
Plus, company-wide revenue and profit would be far higher if not for the financial black hole that is Meta’s Reality Labs segment. Tasked with bringing Zuckerberg’s metaverse ambitions to life, this segment’s spiraling expenses obscure the immense financial power of Facebook, Instagram, and (to a lesser extent) WhatsApp.
Here are some numbers that I feel provide a fuller picture of Meta’s strength: $39 billion of free cash flow in 2021, $44 billion of cash on hand, and zero debt.
With a balance sheet like that, Meta is built for the long haul.
And that should be music to the intelligent investor’s ears.
🎞 The Rise of Reels. For all of the handwringing caused by Cox’s leaked memo, it also revealed one very promising nugget of information: Reels, the company’s short-form video answer to TikTok, are on fire.
The feature is now being used twice as much as last year — with 80% of that recent growth coming on Facebook.
Meta’s Family of Apps already operate on an immense scale (3.64 billion monthly active users), so any new green shoot of growth must be carefully cultivated — and monetized.
After all, the company’s continued social media hegemony depends far more on upping the average revenue per (existing) user rather than trying to scrounge up new ones.
For the math averse, Meta’s user base numbers over half the planet. There’s just not a whole lot of growth left out there.
Last month, Zuckerberg explained his broader strategy to CNBC’s Jim Cramer:
“Our playbook over time has been to build services, try to serve as many people as possible — you know, get our services to a billion, two billion, three billion people, and then we basically scale the monetization after that.”
And, now, it’s Reels’ turn.
Two problems, though…
There’s no guarantee that Reels can even put a dent in TikTok’s armor
Reels currently monetize at lower rates than other avenues like Facebook’s News Feed or Instagram’s Stories
In the latter case, though, Zuckerberg and co. feel confident that they can turn the fast-growing Reels into a big advertising moneymaker just as they did News Feed and Stories before it.
And, to do this, they’ve developed a new weapon for the digital advertising game: a little thing called artificial intelligence.
🤖 AI vs. Apple. Here’s a quick refresher on the Meta/Apple privacy standoff:
In April 2021, Apple released iOS 14.5 and its App Tracking Transparency feature. That’s the pop-up you see when opening a new app that asks for permission to track your data. Of course, you click no. Which dilutes Meta’s ad-tracking tools and results in much less valuable data for advertisers.
In 2022, ATT will cost the company an estimated $10 billion. And, if Meta can’t come up with some new algorithm that plays nice with iOS, that number’s only gonna get bigger and bigger.
App Tracking Transparency, while a godsend for the average user, really cuts Meta’s targeted advertising business off at the knees. Serving up effective ads — and, thus, charging the highest rates — depends on reams and reams of digital data that Meta can no longer access.
Enter our AI overlords.
Zuckerberg hopes that artificial intelligence will allow his company to bridge this gap in data and analytics. “Our AI system can choose, based on what it knows about you and what you personally are going to be interested in and learn about, what you want to see. So, as we get better at that, our engineers are shipping improvements to the models every week.”
“We check something and relevance goes up by a few percent. And then we repeat and do that the next week. And this is just a huge part of what I’ve always focused on in running this company, is getting the velocity to be very quick, so we can keep on making fast improvements to this.”
He also foresees a big change coming to user feeds in both Facebook and Instagram. Now, when you click over to either platform, you primarily see posts from people directly in your social circle (or who you’ve deliberately chosen to follow).
Soon, though, Meta will use AI to create a more personalized flow of information — based on what the artificial intelligence has learned about your preferences and habits. Basically, curation will shift from who you choose to follow to what the Meta AI chooses to show you.
Whether that sounds cool or terrifying is up to you.
Either way, AI is coming and Meta thinks it will mean big things for the company’s bottom line.
🔥💰 The Metaverse. This one really sticks in Wall Street’s craw. Lots of investors and analysts are still scratching their heads over this company’s obsession — including changing its name — with creating the so-called metaverse.
The metaverse, at least in Mark Zuckerberg’s mind, is one part Ready Player One, a dash of the old PlayStation Home online service, and a pinch of dystopian nightmare.
To be fair to Zuck, the metaverse (best described as a virtual world populated with digital avatars of real-life users) might end up a huge business in the future. Some even peg its value to be in the trillions by the end of the decade.
But chasing that pot of gold will cost Meta a lot of money along the way. And no one knows whether or not it will be worth the massive expense and hassle for years to come. In other words, this whole endeavor is a pretty big risk.
Meta’s Reality Labs segment, tasked with bringing the metaverse to life, lost $10.2 billion in 2021 and another $3 billion in just the first quarter of 2022.
In light of the investor outcry — and plummeting share price — the company announced that it will scale back some of these expenses. Zuckerberg has since slashed hiring plans for new engineers and now hopes to save $3-5 billion in company-wide spending this year.
But the Meta CEO still sees a very bright future for his ‘verse:
“We hope to basically get to around a billion people in the metaverse doing hundreds of dollars of commerce, each buying digital goods, digital content, different things to express themselves — whether that’s clothing for their avatar or different digital goods for their virtual home or things to decorate their virtual conference room, utilities to be able to be more productive in virtual and augmented reality and across the metaverse overall.”
Not everyone agrees, though — starting with former Google CEO Eric Schmidt. “There’s not an agreement on what the metaverse is,” he said last month at the Aspen Ideas Festival, “even though one company has changed its name in anticipation of defining it.”
That’s what the kids call throwing shade.
Agree or disagree, Schmidt is far from alone. An Axios survey from March 2022 revealed that just 7% of respondents feel the metaverse makes them “more excited” for the future. On the other hand, the idea leaves close to one-third feeling “more scared”.
So it’s not exactly a surprise that many investors are side-eyeing Meta’s decision to pour $10+ billion per year into this project indefinitely.
📈 Value Verdict. Since its 2012 IPO, Facebook/Meta has rarely traded below a pricy 35x earnings. Now, though, it’s fast approaching single digits.
This is no longer a stock being priced like it hit a bump in the road, but more like it just drove head-first off a cliff.
Here’s what I wrote back in February after Meta suffered its first big fall of 2022:
Honestly, there’s nothing better than seeing a blue-chip company, awash in cash and profits, suddenly drop 25% in price. Big drops are big opportunities. While others wring their hands over paper losses, smart investors swoop in and buy, buy, buy at panic-induced low prices.
And that goes double for a 50% drop.
Companies with the growth history — and potential growth future — of Meta just don’t go on sale very often. And we are pretty deep into value territory at $160 per share.
Now, no one’s saying the next few quarters (or years) will be pretty for Meta investors. Those “fierce headwinds” might be blowing for a while yet. But the company’s long-term prospects still look incredibly strong.
When it comes to Meta, Mr. Market is in one of his foul moods — pricing the stock like there will be very little (or no) growth in the decade to come.
That strikes me as most unlikely.
No one knows when Meta’s stock will return to more reasonable levels, but intelligent investors need not concern themselves with that question. When your investing horizon is measured in decades, what will happen is so much more important than when it will happen.
Fund managers might be required to send out quarterly updates to clients and face tough questions about exactly when a particular investment will pay off, but we aren’t.
Buy excellent companies at depressed prices and then patiently bide your time until the market corrects itself. Therein lies the road to generational wealth.
And, remember, Meta is still growing at a mid-single digit clip even after Apple’s iOS privacy changes and exorbitant metaverse spending with nothing to show for it. We’re living the bear case right now — and Meta is still debt-free and highly-profitable.
If that doesn’t provide a margin of safety, then I don’t know what will.
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Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.