1. Today's deep dive will focus on $META, one of the largest social media platforms, and one of the more polarizing leaders.
We will focus on the business model, moat, capital allocation, and valuation.
Cool charts and numbers courtesy of my friends @stratosphere.io 🧵⬇️
We will focus on the business model, moat, capital allocation, and valuation.
Cool charts and numbers courtesy of my friends @stratosphere.io 🧵⬇️
2. $META, hard to stop saying Facebook, contains two of the strongest social media networks with both Facebook and Instagram, along with WhatsApp. The company's strength in network effects benefit businesses, individuals, and creators.
3. Despite the strong financials, network effects, the company currently is trading down 52% YoY and 73.55% YTD. The company continues to experience a ton of negativity around the future and spending on the metaverse.
4. $META reports financial reports for 2 segments:
đź”´Family of Apps (FoA) $116,493 million
🔵Reality Labs $2,435 million
đź”´Family of Apps (FoA) $116,493 million
🔵Reality Labs $2,435 million
5. Family of Apps, which contains popular apps Facebook, Instagram, Messenger, and Whats App. The company generates substantially all of its revenue from selling advertisement placements to marketers. These ads enable marketers to reach their audiences using many factors.
6. Marketers can purchase ads which can appear throughout the Family of Apps platform, along with 3rd-party apps and websites. Meta competes with Google, Apple, YouTube, Tencent, Amazon, and Twitter for ads. TikTok is coming for all of them and is yet to be determined.
7. Global advertising spend expects to continue escalating, and Meta, Google, and Amazon will continue to compete for share. Currently, in the US, Meta, Google, and Amazon are battling for market share, with Meta and Google dominating.
8. Meta uses the user to data to help advertisers better target their ads, the company is a bit of a black hole for data and has run into hot water for their treatment of user data, i.e. Cambridge Analytica, and Congress calling Mark Zuckerburg to appear before them endlessly.
9. Ergo the famous saying, "If you aren't paying for it, you're the product."
10. Meta tracks their business through a number of KPIs, primarily DAU (daily active users), MAU (monthly active users), and ARPU (average revenue per user). On Feb 2, 2022, Meta reported its DAUs fell slightly for the first time in its history.
11. These KPIs help track the usage on the platform which translates directly to ad revenue. Less users, less ad revenue.
Cool KPI charts from @stratosphere_io
Cool KPI charts from @stratosphere_io
12. And as the company continues to experience stagnating user growth, Meta is for old people, and the rise of SNAP and TikTok among the younger crowd, many fear Meta might be on the downside.
13. Reality Labs is Meta's augmented and virtual reality tech segment, featuring products such as the Oculus VR headset. Augmented and virtual reality are the tech Meta is hitching their future too. They are key to Meta's plans to build out the metaverse.
14. Reality Labs reported revenue of $2,435 million TTM, with a loss of $11,327 million, dragging down the overall profitability of the company. As Zuckerburg continues to bet the Metaverse will be a thing, investing A LOT of money into RL, over $10 billion this year alone.
15. The losses for Reality Labs equal 2019 of $4.5 billion, 2020 of $6.6 billion, and 2021 of $10.1 billion, and on pace to continue.
16. Zuckerberg further told investors that the losses are to be expected since Reality Labs is not just building products and technology for today but for the future as well.
17. “… we’re now basically funding product teams to be building our future products, two or three versions into the future. Because when you’re designing hardware…these are multiyear plans that you’re building and kind of figuring out all the pieces that are going into that,”
18. Meta created a powerful network effect with both Facebook and Instagram platforms. These platforms allow us to post about ourselves and ideas and interact with our friends/family and billions of users.
19. These network effects come into effect with more users posting more content, enticing more users to consume that content. As we consume more content, we spend more time on the platform, providing Meta with more data, allowing them to suggest better ads.
20. Marketers are attracted to the platform for several reasons, first, it is where their customers are, FB or Insta, all of which drives better engagement across the platform. These network effects are powerful as we all saw during the Pandemic with the incessant doom scrolling
21. Financially, Meta is a powerhouse, generating gobs of free cash which it can invest in its platforms including the current money sink of Reality Labs.
22. The company gushes so much cash flow it doesn't have to rely on debt or equity to finance its operations or reinvestments. Currently the company has a net cash postion, meaning more cash than debt on the BS.
23. Frankly, if you took away the name Meta or Mark Zuckerburg, the financials would have most investors drooling. Great revenue growth, generous margins, zero debt, tons of cash flow, and reinvestment opportunties.
24. The only "drag" currently is the Reality Labs bet and the possible slowing of DAUs. Along with the negativity surrounding Mark Zuckerburg and the company in general.
25. Meta' valuation, based on the following inputs:
•Rev growth 15%
•Op Margin 37%
•ROIC 40%
•Sales to Cap Ratio 1.31
•WACC 11.18%
•Rev growth 15%
•Op Margin 37%
•ROIC 40%
•Sales to Cap Ratio 1.31
•WACC 11.18%
26. Gives us a fair value of $232+, well above the current market price of $184. Adjusting the revenue growth to 10% gives us a price of $194, market is pricing in around 8.5%. Keep in mind analysts estimate around 11% over the next 5 years, and Meta has never done <21% 🤷🏽‍♂️🤷🏽‍♂️
27. Meta, still keep calling it Facebook, had to erase about 100 times, lol. Operates tremendous financials, with a somewhat sticky moat. BUT, the elephant in the room is "are they on a decline?" And what to make of the metaverse and Zuckerburg??
28. I have no position, don't plan to start one anytime soon as the company operates outside of my comfort zone and I don't trust Zuck. To each their own, not for me and we don't have to swing at every pitch.
29. If you are still with me, thanks for reading and I hope you found something of value.
For more on Meta, check out @stratosphere_io and @CompassInvStrat great writeup, along with @borrowed_ideas great twitter threads mbi-deepdives.com.
Just scratch the surface here.
For more on Meta, check out @stratosphere_io and @CompassInvStrat great writeup, along with @borrowed_ideas great twitter threads mbi-deepdives.com.
Just scratch the surface here.
30. If you enjoyed this deepish dive, please consider giving us a follow @IFB_podcast.
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