Why Meta Platforms (NASDAQ: FB) Looks Like a Steal to Us at a Share Price of US$203
- Rupam Deb
- Mar 7, 2022
- 11 min read
Meta Platforms (NASDAQ: FB) saw its share price crash after it announced its 2021 fourth-quarter earnings in early February 2022.
In a single day, Facebook’s parent company Meta erased more than US$200 billion in market value, recording the largest single-day drop in market capitalisation ever for a US-listed firm.
Source: Google Finance
The market was spooked by a dismal forecast by the company, blaming Apple Inc’s (NASDAQ: AAPL) privacy changes and increased competition from the likes of TikTok.
However, here at MoneyWiseSmart, we believe that the market grossly misunderstands Meta’s overall business, and the steep fall in its share price is unwarranted.
Famed investor Warren Buffett once mentioned in his company’s 2020 annual general meeting (emphasis is the writer’s):
“But going back to stocks. People bring the attitude to them too often that because they are liquid and quoted minute by minute, that it’s an important — that you develop an opinion on them minute by minute. Now that’s really foolish when you think about it, and that’s something Graham taught me in 1949. I mean that single thought, stocks were parts of businesses and not just little things that moved around on charts or — charts were very popular in those days and whatever it may be.”
We must always remember that behind each ticker symbol lies a breathing, living business.
Therefore, we would like to objectively look beyond the FB ticker symbol and dive deeper into Meta’s business.
The comprehensive full report spans numerous pages and includes the following topics and more:
Business Overview and Competitive Advantage
Financial Summary and Operational Metrics
Growth Prospects
Risks
Valuation
The full report is only available to our Multibagger Research Series subscribers, but we are releasing a free preview for everyone’s benefit as below. Grab a cup of hot beverage and enjoy!
Part 1: Business Overview
Introduction
Meta Platforms, formerly known as Facebook, is a company that may not need much introduction since all of us would have at least used one of its products.
The company’s mission is to “give people the power to build community and bring the world closer together”.
True to its mission, Meta has a couple of products, and they can be broadly classified into two categories – Family of Apps and Reality Labs.
Under Family of Apps, Meta owns:
Facebook
Instagram
Messenger
WhatsApp
Facebook helps give people the power to build community and bring the world closer together. People can share their lives’ moments through features such as News Feed, Stories, Groups, Watch, Marketplace, Reels, Dating, and more.
Facebook’s cousin is Instagram, which brings people closer to the people and things they love. Instagram Feed, Stories, Reels, Video, Live, Shops, and messaging are places where people and creators can express themselves and connect with others.
Messenger is a simple yet powerful messaging application for people to communicate with friends, family, groups, and businesses across platforms and devices through chat, audio and video calls, and Rooms.
WhatsApp is a messaging application used by people and companies worldwide to communicate and transact privately.
Under Reality Labs, its augmented and virtual reality products such as Meta Quest and Facebook Portal help people feel connected, anytime, anywhere.
Meta changed its name at the end of October 2021 from Facebook to reflect its growing ambitions beyond social media.
The name change was announced at the Facebook Connect 2021 augmented and virtual reality conference.
At Connect 2021, chief executive Mark Zuckerberg shared that “meta” comes from the Greek word meaning “beyond”.
Zuckerberg explained in his Founder’s Letter:
“Today we’re seen as a social media company. Facebook is one of the most used technology products in the history of the world. It’s an iconic social media brand. Building social apps will always be important for us, and there’s a lot more to build. But increasingly, it’s not all we do. In our DNA, we build technology to bring people together. The metaverse is the next frontier in connecting people, just like social networking was when we got started.”
He went on to say that in the metaverse, people will be able to do almost anything they can imagine, like getting together with friends and family.
With the name change, Meta will trade under a new ticker symbol “META” in the first half of 2022, replacing the current ticker symbol “FB”, which has been used since the company’s initial public offering in 2012.
Source: Giphy
Business Model
Now, let’s look at how Meta makes money.
Meta generates almost all of its revenue from advertising.
The advertising revenue is generated by displaying ad products on Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications.
Its ads enable marketers to reach people based on various factors, such as age, gender, location, interests, and behaviours.
Marketers pay for ad products either directly or through their relationships with advertising agencies or resellers, based on the number of impressions delivered or the number of actions, such as clicks, taken by users.
Meta recognises revenue from displaying impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to a user.
For the financial year ended 31 December 2021, 97.5% of its total revenue came from advertising. US$’ millionsPercentage of RevenueFamily of Apps, broken down into:115,65598.1%Advertising114,93497.5%Other revenue7210.6%Reality Labs2,2741.9%Total revenue117,929100%
Competitive Advantage
Well-renowned investor Warren Buffett revealed what he looks out for in businesses in his 1995 letter to Berkshire Hathaway shareholders. In the letter, he mentioned:
“In business, I look for economic castles protected by unbreachable’ moats.'”
An economic moat refers to a company’s ability to maintain its competitive advantage and it acts as a powerful deterrent to those considering encroaching the business’ territory.
Investing in companies that keep consumers coming back for more ensures that the firms produce even more profits.
As for Meta, it has a “network effect” moat.
When a new user joins any of Meta’s social media platforms, that platform becomes slightly more valuable.
That, in turn, encourages more users to join, creating a network effect at large. Once this network effect is created, it will be hard for users to leave.
Meta monetises this user base by selling personalised ads to them.
Part 2: Financials
Financial Summary
Meta is an extremely profitable business, as seen from its growing financial metrics over the last five years. FY2017FY2018FY2019FY2020FY2021Compound annual growth rate (CAGR)Revenue
(US$’ million)40,65355,83870,69785,965117,92930.5%Operating profit margin50%45%34%38%40%N/ANet profit
(US$’ million)15,93422,11218,48529,14639,37025.4%Net profit margin39%40%26%34%33%N/ADiluted earnings per share
(US$)5.397.576.4310.0913.7726.4%Cash, cash equivalents, and marketable securities
(US$’ million)41,71141,11454,85561,95447,998N/ANet working capital
(US$’ million)5,062 6,226 7,269 8,911 8,904 N/AReturn on equity24%28%20%25%31%N/AReturn on capital employed25%28%20%23%32%N/AOperating cashflow (US$’ million)24,21629,27436,31438,74757,68324.2%Free cash flow
(reported, and before deducting share-based compensation)
(US$’ million) 17,361 15,222 20,704 23,244 38,265 21.8%Adjusted free cash flow
(after deducting share-based compensation)
(US$’ million)13,63811,07015,86816,70829,10120.9%Adjusted FCF conversion85.6%50.1%85.8%57.3%73.9%N/AAdjusted FCF margin33.5%19.8%22.4%19.4%24.7%N/ADiluted weighted- average Class A and Class B shares outstanding (million)2,9562,9212,8762,8882,859N/A
Over the past five years, Meta’s revenue has grown consistently on a yearly basis at a CAGR of 31%, from US$40.7 billion in 2017 to over US$100 billion in 2021.
Similarly, from 2017 to 2021, the company’s net profit increased from US$15.9 billion to US$39.4 billion, up 25% annually.
Over the past five years, Meta’s net profit margin has fallen from 39% in 2017 to 26% in 2019 before recovering to 33% in 2021.
In 2019, its net profit, and subsequently, net profit margin tumbled. Meta’s earnings declined by around 16% year-on-year, mainly due to higher data centre and technology infrastructure costs, and a one-off US$5.0 billion Federal Trade Commission (FTC) settlement expense. Excluding the one-off FTC settlement cost, Meta’s net profit would have increased by 6.5% to around US$23.6 billion.
However, in 2020, Meta’s net profit rose even though the COVD-19 pandemic was raging. During the year, the company saw a decrease in average price per ad due to lower advertising demand globally in the first two quarters of 2020.
For 2021, Meta’s bottom-line grew 35% year-on-year to a record high of over US$30 billion, way surpassing the 2019 net profit figure of US$18 billion (or US$23.6 billion, excluding the FTC settlement expense).
During the year, the social media giant’s revenue rose 37% year-on-year to US$117.9 billion, largely due to an increase in advertising revenue.
Advertising revenue in 2021 increased by US$30.8 billion, or 37%, compared to 2020 as a result of increases in both the average price per ad and the number of ads delivered.
In 2021, the average price per ad increased by 24%, compared with a decrease of around 10% in 2020.
The increase in average price per ad in 2021 was mainly due to a recovery from declines in advertising demand in the early part of 2020.
Furthermore, overall advertising demand increased, as compared to 2020, across Meta’s ad products and in all regions in part due to the continued growth of e-commerce.
In 2021, the number of ads delivered grew 10%, as compared with a 34% increase in 2020.
The higher number of ads delivered in 2021 was on the back of gains in users and the number and frequency of ads displayed across Meta’s products.
Last year, Meta also repurchased and subsequently retired 136 million shares of its Class A stock (the class of stock that’s trading on the stock market) worth US$44.81 billion. This translates to an average share price of US$329.50. As of 31 December 2021, Meta had US$38.8 billion available and authorised for repurchases.
The share buyback in 2021 mainly led to Meta’s cash, cash equivalents, and marketable securities figure dropping to around US$48 billion for the year, down from US$62 billion in 2020.
At the time of writing, Meta’s market capitalisation stands at US$550.1 billion. If the company were to buy back the total amount of its shares allowed and retires them, it would have repurchased around 7% of its market capitalisation.
In other words, it also means that even if Meta’s free cash flow stays stagnant in 2022 (which is unlikely), its free cash flow per share would have still increased by 7.5% due to the decreasing share count.
Meta’s high return on equity of 31% at the end of 2021 is telling that management is efficient in allocating shareholders’ capital. Return on capital employed (calculated as operating income divided by capital employed plus long-term liabilities) is also excellent at 32%.
It’s worth noting that Meta anticipates additional investments in its data centre capacity, servers, network infrastructure, and office facilities, as well as scaling its headcount to support its growth, including in its Reality Labs initiatives, will continue to drive expense growth in 2022. These would affect its operating margin and profitability.
However, such investments are essential for Meta to stay relevant as the world evolves.
In terms of adjusted free cash flow (which is after deducting share-based compensation), it grew around 21% on an annualised basis. In 2021, Meta’s adjusted free cash flow margin was a high 25%, while adjusted free cash flow conversion stood at 74%.
The company’s adjusted free cash flow conversion is below 100% mainly due to the fact that Meta is spending much more in capital expenditure (capex) than depreciation and amortisation (D&A), with growth capex (total capex minus D&A) standing at around 29% of net income in 2021.
We can expect the growth capex to increase in the near term as Meta invests further in its Reality Labs division (for the metaverse), and gradually taper off in the longer term, producing even higher free cash flow in the future.
Overall, with a growing return on equity, a rock-solid balance sheet with loads of cash and zero debt, and excellent capital allocation, Meta could continue generating tremendous value for shareholders.
Operational Metrics
Since Meta generates the majority of its revenue from users of Facebook and Messenger, it’s essential to track the operating metrics for these platforms.
Trends in the number of Facebook users affect Meta’s revenue and financial results by influencing the number of ads it can show and the value of its ads to marketers.
The key Facebook metrics to track are its daily active users (DAUs), monthly active users (MAUs), and average revenue per user (ARPU). Do note that the metrics do not include users on Instagram, WhatsApp, or other products.
DAU is defined as a registered and logged-in Facebook user who visited Facebook or used the Messenger application on any particular day.
DAUs and DAUs as a percentage of MAUs are measures of user engagement on Facebook.
Source: Meta 2021 fourth-quarter earnings presentation
Overall, the Facebook users are still an engaged lot given DAUs as a percentage of MAUs have been constantly hovering at 66%.
However, DAUs growth is slowing down, as seen from the tapering of the bar charts during the last few quarters.
MAU is defined as a registered and logged-in Facebook user who visited Facebook or used the Messenger application in the past 30 days as of the date of measurement.
MAU reveals the size of Facebook’s global active user community.
Source: Meta 2021 fourth-quarter earnings presentation
If Facebook were a country, at 2.9 billion users, it would have a population size of China and India combined!
How much does Facebook make per user from its large user base? That’s where the ARPU metric comes in.
ARPU is defined as total revenue in a given geography during a given quarter, divided by the average number of MAUs in the geography at the beginning and end of the quarter.
For the 2021 fourth-quarter, Facebook’s worldwide ARPU stood at US$11.57, as seen from the snapshot below:
Source: Meta 2021 fourth-quarter earnings presentation
Facebook monetises users in different geographies at different average rates.
Its ARPU in regions such as the US & Canada is relatively higher, mainly due to the size and maturity of those online and mobile advertising markets.
For instance, Facebook’s latest ARPU in the US & Canada region was 12 times higher than in the Asia-Pacific region.
This also shows that there’s potential for ARPU to increase in the emerging economies.
In fact, Meta expects user growth in the future to be mainly concentrated in those regions where ARPU is relatively lower, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region.
Next, let’s look at the operational metrics for the Family of Meta’s apps. “Family” refers to Facebook, Instagram, Messenger, and WhatsApp products.
Meta’s daily active people (DAP) shows the number of registered and logged-in users who used at least one of these Family products on any given day.
Meanwhile, the monthly active people (MAP) reveals the number of registered and logged-in users of one or more Family products who visited at least one of the Family products over the last 30 days from the measurement date.
Source: Meta 2021 fourth-quarter earnings presentation
DAP and DAP as a percentage of MAP are measures of engagement across Meta’s products.
We can see from the above chart that users of the company’s Family of products are an engaged lot with the DAP/MAP percentage at a constant 78% to 79%.
The engagement is more than Facebook itself, and that could be due to WhatsApp, where the utility is much higher (people generally check WhatsApp more frequently than Facebook).
Source: Meta 2021 fourth-quarter earnings presentation
Here’s a brief look at the Family Average Revenue per Person (ARPP). ARPP is similar to ARPU, but it’s for the Family of products.
Source: Meta 2021 fourth-quarter earnings presentation
Meta’s revenue is seasonally strong in the fourth quarter of each year due to holiday demand during that period. The seasonality has caused the spikes in ARPP that can be seen in the chart above.
But overall, ARPP has increased from US$7.38 in the fourth quarter of 2019 to US$9.39 in the latest quarter.
Source: Giphy
Part 3: Management Team
Management Team
Meta was founded by Mark Zuckerberg, 37.
He owns 89.1% of Meta Class B shares with a total voting power of around 58%. His base salary is fixed at just US$1 per year, and it’s admirable that Zuckerberg actually requested that salary.
Source: Meta 2021 SEC DEFA14A filing
Source: Meta 2021 SEC DEFA14A filing
Zuckerberg’s huge ownership stake in Meta and a nominal base salary could mean that his interests are closely aligned with those of Meta’s minority shareholders.
The leader’s approval rating is commendable at 89%, according to Glassdoor.
Source: Glassdoor
Two other important people from the Meta management team are Sheryl Sandberg, 51, and David Wehner, 52.
Sandberg is the chief operating officer of Meta. She was elected to Meta’s board of directors in June 2012, becoming the first woman to serve on its board. Meanwhile, Wehner is the chief financial officer of the company.
Compensation Structure
Meta’s executive compensation program is heavily weighted towards equity compensation, in the form of restricted stock units (RSUs).
Its cash compensation is generally below market relative to executive compensation at its peer companies.
Meta believes that equity compensation offers the best vehicle to focus its executive officers on the company’s mission and the successful pursuit of its business priorities, and align their interests with the long-term interests of shareholders.
In all, the total compensation of Meta’s C-suite in 2020 (the latest filing available at time of writing) was US$151.9 million. The total compensation was just 0.2% of 2020’s revenue of US$86 billion.
Source: Meta 2021 SEC DEFA14A filing
Part 4: Growth
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Part 5: Risks and Valuation
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