Meta Stock: Mr. Market Shorted Zuckerberg; The future of media is here

Investment thesis

Big Tech stock price year-to-date

Meta Platforms, Inc. (NASDAQ: META) continued to be slaughtered after its FQ3’22 earnings call, with a fall of -73.74% since the start of the year against the broader market destruction of -22.48% in the S&P index 500. Yet others like Amazon (AMZN), alphabetical (GOOG)(GOOGL), and Microsoft (MSFT) may have suffered relatively moderate discounts so far, the rampage is not over, with Apple (AAPL) similarly losing -23.70% of its value at the same time. The moment of maximum pain is not yet here.

Nonetheless, we postulate that Meta’s long-term trajectory remains robust, given the promising signs we are seeing so far. We will discuss this further.

1. Monetization is improving by leaps and bounds

Meta continues to report improved monetization across its Instagram Reels, with over $1 billion in annual revenue to date. Its Facebook platform is also performing very well, given the combined run rate of $3 billion. The company also increased its reel consumption with an impressive 50% growth from six months ago, with 140 billion reels played daily on Facebook and Instagram.

Additionally, Meta has partnered with Salesforce (CRM) to include WhatsApp/Messenger/Instagram Direct as paid messaging/click-to-messaging ads for online businesses. WhatsApp alone saw impressive 80% year-over-year growth to $1.5 billion in run rates, while growing a total of $9 billion in annual revenue from all three platforms. messaging. Additionally, we expect its JioMart on WhatsApp model to be quickly replicated globally as well, with huge potential to build a global business communication/e-commerce/payment ecosystem in WhatsApp/business family. applications over the next few years. Why not?

Additionally, Family of Apps’ engagement remains strong, with 3.7 billion monthly users. WhatsApp alone has 2 billion active daily users, while Facebook reaches almost 2 billion daily users and Instagram reports over 2 billion monthly users. We don’t need a crystal ball to assume that Meta monetization will indeed be very successful, combined with Twitter’s exit effect (TWTR) and potential TikTok ban in the US.

2. Investments are well balanced and promising

R&D expenditure versus revenue

During the LTM, Meta spent 27.4% of its revenue on R&D efforts, indicating an increasing focus on hiring at all levels for Family of Apps, Reality Labs, and Marketing/Sales/G&A, instead of of the false perception of the simple Metaverse. The company is obviously aggressively building its AI capabilities, advertising, click-through ads, and reels against TikTok. Aggressiveness in R&D efforts is obviously of the utmost importance, due to the catastrophic $10 billion headwinds resulting from AAPL privacy changes. In addition, 82% of its FQ3’22 expenditure is devoted to the development and operation of the family of applications. Based on the table above, it is evident that Meta does not overspend on its R&D efforts, compared to other social media companies such as TWTR and Snap (SNAP).

While Meta has also guided Reality of Labs’ incremental spending growth for fiscal year 2023, it will be money well spent as it secures Meta’s leadership in the fiercely competitive market. You can refer to our previous analysis here: Apple Vs. Meta: Mixed Reality Battle. Even Nvidia (NVDA) is investing heavily in the Omniverse, easily pouring 21.22% of its revenue into R&D efforts so far. We continue to believe in Zuckerberg’s passion and vision for Metaverse, especially after witnessing the very promising photorealistic avatars and face tracking the company recently showcased in Connect 2022. We’re starting to see the fruit of its investments, whose market enthusiasm peaked last year at Meta. unveiling of Metaverse and, as a result, died a tragic death during these peak recessionary fears.

The application in Metaverse is much broader than just for online games and world building, like Roblox (RBLX) or Horizon World. As more large tech companies embrace remote working post-pandemic, we expect these capabilities to grow as B2B applications for virtual AI training, hologram video calls, industrial simulations/ large-scale design/engineering/architecture, revolutionizing scientific discovery and improving 3D workflows. globally. Meta will get there sooner than expected, given its expanding partnerships with MSFT, Adobe (ADBE), Autodesk (ADSK), Zoom (ZM), Accenture (ACN), and others. Don’t be as myopic as Mr. Market.

Capital expenditure to operating cash flow

Additionally, Meta’s capital investments in Data Centers and Reality Labs are still relatively moderate so far, compared to other Cloud/e-commerce peers such as AMZN, although understandably high compared to GOOG and MSFT.

In the meantime, we are not at all concerned about this level of investment, as the company continues to report robust FCF generation of $26.4 billion in the LTM, compared to -$26.32 billion for AMZN, $62.54 billion for GOOG and $63.33 billion for MSFT. time. Even with such impressive numbers, the latter two couldn’t escape the ongoing massacre with shares falling -42.45% and -36% year-to-date, respectively. Tragically, as we expect Meta’s ambitious expansion during the recession to pay off once the macro economy recovers and market sentiment improves.

3. Its FCF profitability will improve

Meta should report adj. income and adj. net income growth at a CAGR of 13.9% and 3.6%, respectively, between FY2019 and FY2025. And as evidenced by the destruction of its stock price, the forward execution of the company has also been massively downgraded by -22.35% now. I guess some of the discounts are justified, as its EBIT/net profit margins are expected to deteriorate further from 41% / 34.8% in FY2019, 39.6% / 33.4% in fiscal year 2021 and 24.1% / 19.7% in fiscal year 2025.

This naturally explains Meta’s FY2025 EPS deceleration of $12.12 at a CAGR of -10.1% over the next four years from FY2019 EPS of $8.56 at a pre-pandemic CAGR of 26.5. % and FY2021 EPS of $13.77 at a pandemic CAGR of 26.8%.

On the other hand, Meta is expected to report a massive 87.08% jump in FCF generation year-on-year in fiscal 2024 once spending normalizes and ad dollars return to full steam. . Investors should also note the sustained improvement in its profitability in FCF terms, rising from margins of 30% in FY2019, 33.2% in FY2021, and finally to 39.7% in FY2025. Thus reducing the need for the company to go into debt from the 2024 financial year.

And in case anyone forgot, AAPL recently announced a eye-watering $98.95 billion in long-term debt and $2.93 billion in annual interest charges on its recent call. to results FQ4’22. These figures have increased by 7.78% and 6.15% since Q3 2019, while its net debt continues to increase by 62.57% to -36.62 billion dollars and cash/investments at short term continue to fall -51.96% at the same time. This indicates AAPL’s increased reliance on debt and declining liquidity over the past three years.

So really, why should anyone belittle the paltry $10 billion in Meta debt reported in FQ3’22? Especially given its impressive FCF adjusted CAGR of 19.3% between FY2019 and FY2025. In the meantime, we encourage you to read our previous article on Meta, which would help you better understand its market position and opportunities.

• Meta Platforms: Absolute Carnage – No Floor Visible

So is Meta Stock a buySell ​​or Keep?

Meta 10Y EV/Revenue and P/E Valuations

Meta is currently trading at an EV/NTM Revenue of 1.90x and a P/E NTM of 12.35x, an all-time low in 10 years. The stock is also trading at $88.91, down -74.87% from its 52-week high at $353.83, closing in on its 52-week low at $88.41. Nonetheless, consensus estimates remain bullish on Meta’s outlook, given their price target of $153.85 and a 73.04% upside from current prices.

Meta 10 year stock price

It is obvious that there is no clear floor and support here. Meta stock continued to fall drastically by -31.51% after its FQ3’22 earnings call, significantly worsened by pessimistic market sentiments.

The latter is attributed to the unfortunate reversal of the Fed’s supposed pivot after the Bank of Canada hiked 50 basis points earlier than expected. Early signs are already pointing to an equally high inflation rate for October, triggering painful CPI/PPI results in October and November. With 48% of analysts expecting a further 75 basis point hike at the December Fed meeting, we can be assured that more headwinds lie ahead. Terminal rates are already tentatively raised to 5.14% for June 2023, indicating a further 50 basis point hike for the Fed’s February 2023 meeting.

Combined with the gloomy directions from Meta’s management into 2023, it’s easy to assume that Meta could fall further to $70 in the next couple of months. Bottom fishing investors would be well advised to wait a bit longer and load then. However, we choose to nibble at these levels, since most of the pessimism is already entrenched. Of course, you also have to be prepared for some moderate volatility ahead, for portfolio growth over the next decade.