In our Big Story section in Portfolio edition dated August 1, we had carried the article ‘There’s byte beyond the FAANG’s’. In that we had explained how while the FAANG or FAANGMs listed in the US had caught most people’s attention, there was a much vast universe of opportunities for investors to explore for international diversification. One of the reasons to nudge investors to look beyond the FAANGs was our view that many of the FAANG stocks — while still having solid fundamentals at their prevailing valuation — were not giving the right opportunity to enter in terms of value from long-term investing point of view. In such situations, the ideal thing to do is to wait for a good entry point.
After last week’s correction, Meta Platforms (Facebook) appears to have provided a good entry opportunity. With Meta correcting by around 25 per cent this week, the stock is now down 12 per cent in the last one year and 38 per cent from its all-time high of $384 reached in September 2021.
Based on analysis of company’s results/outlook and its history of good execution, its correction provides an opportunity to start accumulating the shares at an attractive valuation. Meta now trades at a one-year forward PE of 16 times (5-year average at 21), EV/EBITDA of 9.6 times (13.1) and EV/Revenue of 4.5 times (7.3). These are very reasonable valuations for one of the world’s largest and foremost technology companies. Meta has a history of solid execution that gives confidence it can deal with current challenges that came to fore in last week’s quarterly results. The company has over $48 billion in net cash (excluding lease liabilities) and generated free cash flows of $39 billion in CY21 as against its current market cap of $645 billion. Its solid cash position and cheap valuations are cushions offering good margin of safety against operational risks. It also has $39 billion available under approved stock buyback plan (6 per cent of current market cap) that could be aggressively deployed if the stock corrects more.
Its cash flows and profits would be even better if not for the billions of dollars every year the company is investing into its Reality Labs division with a strategic vision to develop a meta verse and be a leading player in that space. Investors buying into Meta get a core leading social media business empire at an attractive valuation and the option to benefit from a mega tech theme if its bets on meta verse pays off.
Thus the reasons to buy the stock after correction is compelling. Even after factoring for the aspects mentioned below, current levels are good to enter and more can be accumulated if it declines. Some of these aspects are — negative sentiment may linger for a quarter or two and whether the stock has found bottom or not, only time will tell. The recovery may not be V-shaped and investors must be ready to hold for the long term. A bet on the company’s prospects in metaverse also requires a long-term perspective as even, according to company executives, it could take 15 years to realise the complete meta verse vision.
Even to start realising some meaningful revenue/profits from this segment will take few more years. This apart, the stock may not be immune to broader market corrections.
Business and recent performance
Meta has two business segments – Family of Aps, and Reality Labs. Currently, Family of Aps is the main operating segment accounting for around 97 per cent of revenue and 125 per cent of profits (some of the profits from Aps segment is ploughed into Reality Labs).
Family of Aps business consists of company’s suite of dominant social media platforms – Facebook, Instagram, WhatsApp and Facebook Messenger. Across these apps, the company had between 2.8 and 2.92 billion of monthly active users in CY21. Its massive engagement metrics makes it one of the most preferred advertising platforms globally. Meta rakes in massive amounts of ad revenues, making it the second largest ad platform globally after Alphabet (Google). This segment is also highly profitable with operating profit (EBIT) margin of around 49 per cent in CY21.
Reality Labs is the segment that Meta wants to bet on for a future beyond Family of Aps. The company has, for many years, been planning to move beyond its core social media platforms on expectations that at some point of time that business would reach saturation in terms of growth prospects. The other key reason is to be involved in a business right from an early stage where it has more influence over the ecosystem or less dependence on ecosystems dominated by rivals — like is currently the case in mobile operating systems.
The company has been working behind the scenes for years on its metaverse plans from the time it bought virtual reality tech company Oculus in 2014. Since then it has been ploughing billions into the project. In 2021, it incurred losses of $10 billion in this segment. In 2020, it narrowed down to $6.5 billion. And the company expects operating losses in this segment to increase meaningfully in 2022.
While this might raise concerns, the other way to look at it is that Meta is moving leaps ahead of its rivals when it comes to being ready for potentially one of the next biggest themes in technology. The losses looked at the other way, are investments in developing intellectual property and ecosystem to be a dominant player in metaverse.
In the recently concluded CY21, Meta reported revenues of $117.92 billion and net income of $39.37 billion. The Y-o-Y growth was at 37 and 34 per cent respectively. In CY22, Meta is expected to report revenue and net income growth of 14 and 6 per cent, respectively (Bloomberg consensus). The growth in profits is tempered by investments in Reality Labs and is expected to rebound in CY23.
What triggered the stock crash
Meta revenue guidance for March quarter came in 7 per cent below consensus expectations, driven by two headwinds – iOS privacy changes that made targeted advertising more difficult, and competition for people’s time from competitor aps. This came as shocker to investors, triggering a crash.
While these are certain to impact near term performance, Meta has a good track record of successfully dealing with and overcoming headwinds. The stock corrected 50 per cent within months from its IPO in 2012 as it initially faced headwinds in monetization as users shifted from desktop to mobile aps. Similarly, the stock crashed when the Cambridge Analytica issue surfaced in 2018. Company execution and stock performance since both these testing periods bears testimony to its capabilities to deal with challenges.
