I know it looks bad, but hear me out: I think Meta Platforms Inc. (META, Financial) could be the perfect value investment for 2023. Analysts are projecting that Meta could book revenue of $117 billion and earnings per share of $10.00 for full-year 2022, which means it is trading very close to the lowest valuation out of its entire existence as a publicly traded company.
Formerly known as Facebook, Meta is the largest social media company and owns a number of popular platforms, including Facebook, Instagram and WhatsApp. Despite its social media dominance, in the past year, the stock has suffered due to a combination of factors, including declining advertising revenue and a slowdown in Facebook user growth.
Moreover, Meta has spent nearly $10 billion trying to become the Apple (AAPL, Financial) of the Metaverse, a 3D version of the internet that has thus far failed to take off as hoped. The above factors coupled with increased regulatory pressure, especially that from the European Union, have produced a lot of fear and uncertainty.
It's easy to see why. CEO Mark Zuckerberg’s pet Metaverse project, Reality Labs, has cost the company billions in both real dollars and opportunity loss. More importantly, it could turn out to be a completely foolish endeavor if not enough people jump aboard the Metaverse train.
On the other hand, Meta has made great progress in the virtual reality and augmented reality space, which means if it is right and millons of people around the world become immersed in the Metaverse, it could rake in profits for decades to come.
Personally, I think it’s a problem for humanity if we all decide to spend our time in the Metaverse. That doesn’t stop me from seeing the value opportunity if I’m wrong. Even if it doesn't pan out that way, Meta is still a trillion-dollar company masquerading as a $300 billion one, as its social media companies definitely haven't lost two-thirds of their value.
Here are some facts:
- Facebook has north of 4 billion monthly active users (I’m one of them).
- WhatsApp has yet to be fully monetized and has over 2 billion monthly active users.
- Instagram is still going strong with over 2 billion active users per month.
- Meta Platforms has $42 billion in cash and 80% gross margins.
The company absolutely pounds out cash and can afford to test out a new channel for future growth.
Meta has also been actively buying back its stock. It spent about $14.7 billion on repurchases over the first half of the year, which value investors can expect to continue supporting the company's financial performance. Shares outstanding will fall to 2.5 billion in 2023. Despite spending a ton on Reality Labs, the company is still anticipated to see operating improvements in the coming years, as its apps remain well-positioned in the social media space.
Social media still dominates
Very little happens outside of their favorite social media networks for the majority of social media users. People are social creatures and are more likely to consume things like news and advertising if it comes from a platform where they interact with other people. Mobile advertising should continue driving the company's performance.
Some investors may believe that despite trading at historically low valuations, it is unlikely that Meta will rebound in 2023. In addition to short-term costs associated with its Metaverse project, Meta's net income has declined by more than 25% in the past two years, and the company has taken on $10 billion in debt in its first ever bond issuance.
While Meta remains a leader in digital advertising, it is facing increased competition and regulatory issues. One big issue was that Meta faced consequences for not complying with the General Data Protection Regulation (GDPR), a set of European privacy rules that became effective in 2018. The European Data Protection Board fined the company $275 million, a far cry from the $13 billion possible, which only further goes to demonstrate the political power Meta wields.
2023 and beyond
To be fair, who cares about the short-term outlook as a value investor? If the stock price gets cut in half but the underlying business remains solid, then in theory, it should be good that the stock price is lower. The question we really need answered is, why should we bet on the company's long-term outlook?
At the risk of sounding like a fanboy, the reason I have faith in the company is Mark Zuckerberg. He’s already built this amazing globally connected social media empire before reaching 40 years of age. So, why would I bet against him over the next 20 years?
The second reason is that marketing is the lifeblood of business. Advertising is where the money is on the internet - that and selling data. Facebook is the most successful ad platform for users and it has only scratched the surface. It has yet to monetize the 2 billion users on Whatsapp, but it plans to.
Most importantly, companies are going to continue to spend billions to reach and sell to Meta's collective users, and as more companies come to market, ad revenue will rise. The best thing for Meta to do is test whether it can raise the costs to ad buyers and see if the volume stays the same, though that's just my take. Who knows, perhaps it could even take advantage of advertisers fleeing Twitter.
Will Meta succeed in the Metaverse, and will it even matter? Only time will tell. There are a lot of technology firms spending billions to build virtual worlds. I don’t think it’s just the lemming effect. Also, plenty of major financial institutions are working on building infrastructure for digital assets like bitcoin and ethereum, which are crucial to the Metaverse economy.
Don’t get me wrong, I personally think all this is silly, as the Metaverse is just an added layer of complexity that avoids reality and is likely a bad idea for civilization. It's like video games on steroids, and as for me, I don't want to live in a video game world. However, in the event that I’m wrong and by 2030 millions of people are switching over to spend their day or part of their day in virtual worlds, Meta is likely to lead the way.
With a market capitalization just north of $300 billion, Meta is generating close to $30 billion in net earnings on $120 billion in revenue while about a third of the population of the planet logs into one of its social media platforms on a monthly basis. That's $30 per person on the top line. The business moat on this company is enormous, which is why I don't think Meta's main profit-generating engine is going to go downhill permanently.
