Meta (former Facebook) is dead, or not? The stock is currently down more than 46% from all-time highs. This should mean the company is performing badly right? I mean a 46% percent drop is a lot. If we compare this to the performance of other mega cap stocks we can see a big discrepancy. Meta must be really underperforming. Today we talk about the company Meta platforms, we check out the latest earnings, their year performance, the risks and in the end we will conclude if this company is dead or not.
First of all, before investing it is very important to know how your company makes money. When ignoring this step, It will be hard for you to figure out the potential risks of the business later. Meta exists out of two segments. The first one, which is also the largest in revenue, is the “Family of Apps“. The second one is “Reality Labs”.
Family of Apps consists out of Facebook, Instagram, Messenger and WhatsApp. Revenue made by this segment is mostly from advertising. Reality Labs consists out of augmented and virtual reality products. Meta Quest let’s people defy distance with cutting-edge VR hardware, software, and content.
Latest quarter advertising revenue grew at least 20% year over year from 27 billion to 32 billion dollars. Total revenue also grew 20% year over year. 20% growth for a company as big as Meta is not very easy to pull off.
If we take the numbers of 2021, revenues grew 37% year over year with 36% growth in the Family of Apps and 100% growth in the Reality Labs segment. What is even more impressive is the growth in profitability. Meta grew profitability faster than revenue, which is normally harder to pull off. The income grew with a whopping 43% year over year. This company is a cash machine and is still growing very rapidly.
Similar for the free cash flows, we see big growth over the last years. They tripled free cash flow in two years. Very impressive. With free cash flow the company can do share buybacks, pay down debt and invest in growth opportunities like the metaverse.
Meta has been buying back a lot of shares with the free cash flow and the cash reserves they had. They bought back around 19 billion dollars of shares last quarter. They are still authorized to do 38 billion dollars in buybacks. Since they got 48 billion dollars in cash, cash equivalents and marketable securities don’t be surprised if they take their chance to buyback even more shares with the current drop in share price.
So seeing the steady growth in Meta’s revenue, earnings, free cash flow and knowing that Meta is a quality company what price to earnings would you be willing to pay for it? For me anything around a pe of 20 seems reasonable. Guess what, it is currently trading at a pe below 15. In the current market you have a lot of companies that are trading at a higher pe and have almost no growth ahead. Of course, the new investment in the metaverse and slowing growth in the core of Meta can bring problems to the business visibility for the coming years.
Let’s look into some of the possible risks. First thing that comes to mind is slowing growth and increase in competition. We can see that growth of daily active people is slowing down in the latest quarters. Corona lockdowns have drawn more people towards social media, but the economy is recovering now as people go back outside. This is what we can clearly see here.
This is a valuable risk, but the growth in average revenue per person does offset this. Meta is making more money per active person. I did not find the reason for this. My guess is that they are signing better contracts with advertisers. Overall this balances out the first risk.
Second risk is the increase in competition and we have a big one: TikTok. I think by now everyone has heard once about it. More and more young adults are getting attracted by the short funny videos that are available on TikTok. That’s why Meta is focusing more on Reels. They think it is so important over the long-term. They want to create an even better experience for young adults. There is a trend shift towards more short videos and Meta wants to be at the forefront by investing now. We will see how these investments will pay off against the rival TikTok.
Another risk is that Meta is currently facing is Apple’s IOS changes. Less data is available for Meta to deliver personalized ads. Overall I think this risk is not extremely big, given the fact that the IOS changes strikes all the other advertising companies. On the other hand, Meta is already rebuilding their advertising infrastructure so they can continue to grow and deliver high quality personalized ads. Investments in AI also deliver better ads to people while using less data.
All things together I think Meta is trying to decrease the current risks of their core business while building out a new vision, the metaverse. They are still actively managing their core business to grant a lot of cash flow to the balance sheet. Remember when Instagram changed their logo? A lot of people thought the company did a bad job but since the change Instagram gained even more popularity than Facebook. We can only wait and see if this new metaverse segment will grow out to be the core business of Meta. In my opinion, this does not even matter at the current valuation. Meta is still earning a lot of money, growing at a decent pace and innovating forward.
Too lazy to read? Check out my video! Does The Undervaluation of Meta Outweigh The Risks? | Meta Platforms Analysis - YouTube
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- Not Sure