Buy: Meta Platforms

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$109.46, big tech with a long fall from grace: Meta Platforms is a US technology company providing online social platforms for international users. Meta's share price has fallen significantly over the last year due to its slowing revenue growth and unpopular investment in virtual reality. I believe that the earnings estimates priced in by the markets are too low, and that risk-reward is overweight towards the upside.

Forex pressures are easing: A key factor for Meta's slowing revenue growth is the recent strength of the US dollar. With US interest hikes set to ease mid-next year, I expect a weakening of the US dollar, which would help Meta's earnings next year.

The venture into the Metaverse may be a problem, but it is a self-inflicted problem: In Q3 2022, 39% of all operating income produced by Meta’s core business went into the Metaverse. The spending on its Metaverse investments and operating losses from those investments have been suppressing Meta's earnings. This spending spree is nevertheless a choice Meta chooses to make, so it could easily scale down these investments if they do not eventually prove successful.

Upcoming catalysts include: The monetisation of messaging platforms such as Whatsapp and Messenger. The successful monetisation of metaverse hardwares and softwares.

Key risks: (1) Corporate governance of Zuckerberg, (2) successful execution of new growth opportunities from metaverse investments, (3) maintaining the leadership position in the field of social media

Tail headwinds: (1) Tiktok Ban: A senior figure in the FBI said that Tiktok, Meta's major competitor in social media advertising, poses a significant national security risk. With US-China relations deteriorating inevitably, a ban on Tiktok is ever more likely, which will force users to migrate to Instagram and Youtube which provides similar short-form videos in the forms of Instagram Reels and Youtube Shorts. (2) Twitter Debacle: Twitter may have lost more than a million users since Elon Musk took over. Some Twitter users would switch to one of Meta's platforms such as Instagram and Facebook. (see Exhibit 4 for the market shares of Tiktok and Twitter)


Key risks

  1. Zuckerberg has full control of the business by owning 57% of the voting rights. The fact that Zuck is the autocrat in the Metaocracy is a double edged sword. If you believe he is the right person for the leadership role in the next 10 - 20 years, then you would see this as an asset. Yet some leaders may be suitable for the early stages of a business’s lifecycle but become less suitable as the firm matures. Many doubt Zuck’s vision of the Metaverse. I believe that Zuck has a vision, however it is badly delineated. Meta has still not made clear how it would monetise its Metaverse business. Moreover, as the metaverse seems to be the brainchild of Zuckerberg, he may be willing to take more risks and devote more money than sensible into the field.

  2. The success of the metaverse is still anyone’s call therefore I have built into my valuation the conservative, pessimistic assumption of 0% growth of Meta’s current and future R&D spending.

  3. The doomsday scenario would be Meta losing its leadership status in the social media market. The EU is planning to force messaging apps to be able to talk to one another. Yet I believe due to the network effects of messaging apps and social media platforms, it is extremely difficult for a new entrant to challenge existing platforms. There is no doubt that the users of Meta’s platforms are plateauing, but as the internet penetration and smartphone usage in developing countries continue to grow, Meta’s users will also grow steadily, but not as rapidly as before.


Valuation

I have assumed 0% growth in Meta’s future R&D spending.

Capitalised R&D expense.

(more details in the webcast below where I walk through the entire valuation)

Result: Meta is 22% overpriced. I think this is a doomsday scenario, since it is almost impossible that Meta does not generate a return on its R&D. Given that it is spending so much on R&D right now, I think even a small return on investment would bring the stock to fair value if not higher.

Webcast


Key Charts (source Statista)

Exhibit 1: Overview of the growth of online advertising as a % of total ad revenue

Online advertising has become a big part of the entire advertising business

Exhibit 2: Overview of the expected growth of social media advertising

There are high growth opportunities in social media advertising

Exhibit 3: Facebook's monthly active users

Facebook has been facing significantly slow growth in monthly active users

Exhibit 4: Meta's competitors in the social media advertising segment

Meta's largest competitors in the social media advertising segment are: LinkedIn, Snap, Twitter, and Tiktok

Exhibit 5: Compared with other companies, public trust in Meta protecting personal data is low

There is little trust in Meta and Zuckerberg. As a result, it's my opinion that if Zuckerberg was to announce his resignation, Meta’s stock would react very positively.

Exhibit 5: Biggest spenders of digital advertising

Retail, pharma, and entertainment industries spent the most on advertising in 2022 in the US



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