Mini writeup on Facebook ($META)
In addition to my Substack newsletter, I also run a private Stocktwits room where I post my current portfolio, daily buys/sells/hedges/options, technical analysis (charts) , investment models, market commentary and much more. Signup for a free trial at stocktwits.luptoncapital.com
Meta Platforms (META): Pioneering The Metaverse
Current stock price: $130.01
Shares outstanding: 2,687.5 billion
52 week high: $353.83
All time high: $384.33
52 week low: $122.53
Market cap: $349.4 billion
Net cash: $23.8 billion
Enterprise value: $325.6 billion
Headquarters: Menlo Park, California
Number of employees: 80,000+
Average price target from analysts: $216.15 (66.3~% upside from current price)
META (formerly known as Facebook) is a stock that I get asked about quite often considering that most people are very familiar with their products/apps (ie Facebook, Instagram, WhatsApp, etc) but also because the stock is down more than 65% from the all time high (September 2021) and now trading at it’s lowest NTM EV/EBITDA multiple since the company came public in 2012.
I currently have no position in META however given the 65% selloff and current valuation I’d consider one in the near future but not until we get through earnings season. I’m definitely a growth investor and META is no longer a growth stock however they have the potential to be a FCF monster over the next few years, similar to AMZN and UBER — as capex comes down and FCF margins go up.
META (personally I hate this name) has become a cheap stock but that’s because the growth has disappeared thanks to TikTok, YouTube and other platforms taking some of their market share (users + ad revenue). Between 2012 and 2020, META’s revenues grew 42% per year (CAGR), but between 2021 and 2026 their revenues are only expected to grow at 8% per year. This is a massive slowdown and why the stock has been “rerated” (aka multiple contraction) and now trades like a value stock. However the question now is whether META is worth buying at these prices or is this the classic ‘value trap’ that investors should continue to stay away from as they pour more and more money into the metaverse which might not pay off for 5-10 years.
I’m not sold on the metaverse and I think the stock price has been partially clobbered because other investors are also not convinced this is where META should be investing right now. I believe META is still planning to spend $10 billion per year on the metaverse which is alot of money that perhaps could be better spent on acquisitions, buybacks or maybe even a dividend. I know that dividends are a dirty word for growth stocks because it’s essentially the company admitting that growth is in the past and now they’re going to begin returning capital to shareholders rather than investing for future growth but maybe the META board needs to admit this is no longer a growth story and it’s time to embrace reality.
The reality is that META is a cash cow growing at 8-12% that needs to attract a larger investor base and it’s possible that paying a dividend could help accomplish this considering there are thousands of mutual funds, ETFs and other types of investors/strategies that only invest in dividend paying stocks. They might love META at these prices and multiples but no dividend means no position. I think it’s time for META to consider changing this. If they implemented a 1.5% dividend which would be approx $1.95 per share (not super appetizing with the 10Y yield above 4% but still better than nothing) it would cost them approximately $5.24 billion per year (on 2.687 billion shares) which is less than 20% of the expected net income in 2022. They could add a 1.5% dividend and still keep buying back $20 billion of stock per year. META has bought back an insane amount of stock over the past couple years (more than $40 billion) and I’d argue it was a bad use of capital considering those buybacks were done at much higher stock prices. For instance, META bought back $14.5 billion of stock in 2021Q3 and then announced a new $50 billion stock buyback plan. Ironically those buybacks and that announcement all happened with the stock at all time highs. If we go back to September 2021, yields were very low, money market funds were paying under 1%, so a 1.5%-2.0% dividend yield from Facebook would have looked pretty damn good although 1.5% of a $350 stock price would be costing META close to $14 billion per year. If there was ever a time to start paying a dividend it’s with the stock at 4-year lows.
Getting away from the dividend/buyback argument, META is still a beast in terms of monthly/daily active users and still providing a massive audience for their advertisers however they have a problem with user growth and engagement which is a direct result of the rise in TikTok. I’d never recommend META on the hope that TikTok was banned however if that actually did happen it would probably give META’s stock price a 30% rally. Same for SNAP (aka Snapchat) and other social media platforms.
In hindsight, META should have launched Reels much earlier rather than letting TikTok become such a dominant force amongst teens and millennials. I do believe Reels can be a significant product and revenue generator for META but they’ll always be a second option to TikTok which is now the most downloaded app on a monthly basis according to recent data however META’s four main apps take the next four spots which is quite amazing. This leads to my next point which is META needs to do a better job at monetizing WhatsApp and Messenger considering both products have more than 1+ billion monthly users.
As you can see, people are spending a significant amount of their social media time on YouTube and TikTok, this is not the trend that META shareholders want to see. If you look at the data narrowed down to kids/teens, TikTok is approximately 50% of their social media usage per day with the other 50% split between Instagram, Snapchat, Twitter and Facebook. Kids and teens are spending an average of 75-90 minutes per day on TikTok.
For all the criticism that Mark Zuckerberg gets (much of it deserved) he might still own the best acquisition of all-time when he bought Instagram for $1 billion in 2012 when the company had less than 20 employees. A year ago it was possible that Instagram would have been worth $300 billion as a standalone company but now that tech multiples have come way down it’s possible that number is closer to $150 billion which is still a 150x return on the acquisition price. The only other deals that come close to creating so much shareholder value are Google buying YouTube in 2006 for $1.6 billion and eBay buying PayPal in 2002 for $1.5 billion. All three deals would be on the Mount Rushmore of M&A transactions over the past 25 years.
I think many META investors are willing to be patient with Zuck because of how well his bet on Instagram paid off. 10 years ago when he bought Instagram most people thought he was insane paying that much for a startup with no revenues but Zuck had the vision and it’s been a homerun for META but now he’s making an even bigger and more expensive bet on the metaverse which is bringing a similar amount of skepticism. I do wonder how much Zuck really believes in the metaverse or does he feel pressured to create the “next big thing” for META shareholders?
Largest social media platform in the world that continues monetization within advertising space including; Facebook Shops, Instagram Shopping, Messenger, WhatsApp, and Oculus VR. Supporting extended runway for growth and monetization potential in Asia and emerging markets.
Robust balance sheet and free cash flow generation allow for expansion into novel and complex visions, specifically the metaverse.
A heavily weighted tech giant in the Nasdaq that is down roughly -61% YTD and -30% in the last 6 months, trading at a P/E multiple that is 50% lower than the average Nasdaq 100 stock.
The company’s metaverse has a long-term vision, hence development in this novel space should be thought of in exponential terms, not linear — however we won’t know for many years whether this metaverse bet is going to pay off.
Thesis: Pioneers in Virtual Reality
Meta has a first-mover advantage in a push towards a digital world, specifically changing the way individuals work, communicate, and create. Q2’ earnings reported R&D expenses of +43% year-over-year, with the majority contributing to investments in Reality Labs, which is Meta’s augmented and virtual reality segment of their business. Expect Meta to continue deploying billions into Reality Labs, as this is the core instrument of their metaverse.
The tailwind of Reels advertising opportunity in the short term, along with Commerce possibilities over the long term. Investors do not necessarily have to be strong believers in the metaverse narrative to be bullish on the stock. The initial goal of attaining 1B metaverse users is not overly ambitious, as this would be approximately 40% of gamers. Advertising from the company remains unmatched in scale and marketer tools compared to competitors (TikTok).
CEO, Mark Zuckerberg is “all in” on this space, contributing to quarterly profits suffering (-8%, or $10.3B). Willing to sacrifice CAPEX to win this paradigm shift. From an investor’s standpoint, the ROI is difficult to value, hence the speculation around management, and rightfully so.
The Main Theme: Inflection Point and Transition Towards Metaverse
The Metaverse will ultimately be inventible, as we evolve from traditional layers of gaming. Examining the creative destruction processes over the last few decades can be witnessed below based on the timeline. One must think of the advancements made in gaming since the early 2000s and ask why augmented reality and virtual reality haven’t come sooner given the technological advancements society is making elsewhere. I believe 3D gaming will be where the person using the controller finally becomes the player himself, hence the metaverse’s prominence.
Although there are several metaverse platforms such as Roblox, I believe Meta has the largest competitive advantage due to 2.8B people currently using their platform. The question then becomes, how does the company convert the majority of its consumers to explore avenues within the metaverse, especially theirs.
Recent Key Highlights:
Meta’s recent deal with Qualcomm to develop custom virtual reality chips for Meta’s Quest devices further highlights the abundant opportunities in this space, hence the strategic partnership. This also reaffirms Meta’s commitment in improving the company’s Metaverse, enhancing hardware and user experience overall.
Salesforce partnership to integrate WhatsApp with their services, allowing businesses to chat directly with customers from Salesforce’s platform.
Meta will announce Q3’ earnings on October 26th with expectations that revenue will be flat year-over-year at $26-28B for the quarter versus the street’s consensus of $30B. In regards to total expense, the company expects this figure to increase significantly from $92B the prior year down to expected estimates of $85-88bn, resulting in a 22% year-over-year improvement primarily driven by the hiring freeze enacted over the summer.
From a macro perspective, an overall slowdown would certainly put tech out of favor, leading to price following earnings. Furthermore, the advertising spending has decelerated not only from Meta, but from other market dominants within the space (MSFT, GOOGL, AMZN), highlighting a consensus among Big Tech's serious headwinds in the near future. However, despite the uncertain economic backdrop, Meta is well positioned given its scalability in terms of platform and user-friendliness.
Meta has continued to be the laggard in FAANG stocks this year. The first elephant in the room is TikTok stealing market share from Meta’s user growth, contributing to the overall slowdown in users. However, Instagram could help offset a large part of this shift in attention from young adults.
I am optimistic about the company’s augmented reality (AR) and virtual reality (VR), though sales will be the narrative here, particularly with how the new Quest Pro sells on the market. Investors and consumers either do not fully understand what the metaverse actually is, or are hesitant in transitioning from Meta’s core business model to this new paradigm. Hence, the company’s capital expenditures increasing are a direct correlation to investors’ uncertainty. This ties into the question of whether fundamentals are deteriorating, or does the company simply need to revitalize its business model for the long-term success of its existence.
Regulatory scrutiny continues to be an overhang on the company itself and is reflected in the current stock price. Apple’s iOS privacy change should be baked in at this point, though making it more difficult to focus on specific users for ad targeting.
As noted earlier this is the cheapest that META has ever traded but that’s because growth has slowed considerably and the future is less clear with more competition than ever before not to mention a possible looming recession which would be bad for advertising spend across META’s different platforms.
If we value META on net income, the stock is currently trading at 12x 2022 EV/NET INCOME and 11.2x 2023 EV/NET INCOME.
If we value META on free cash flow, the stock is currently trading at 15.5x 2022 EV/FCF and 12.7x 2023 EV/FCF.
All of these numbers are way below META historical multiples but we all know why so I won’t dissect the reasons again.
Currently META looks cheaper using net income but if they start to lower capex and get other spending under control it should lead to higher FCF margins in which case META may look very cheap based on 2024 and 2025 FCF numbers (possibly sooner).
I know it might be hard to see but I included META financial data going back to 2016 so you can see how much faster this company was growing 5-6 years ago as well as their much higher FCF margins. This is where META management team needs to focus their attention — they need to get those FCF margins back to 35-40% if they want this stock in the $300s again before this decade is over.
As mentioned above, you can choose to value META on net income or free cash flow so I provided some estimates for both. If you look out to 2026, assuming the company can get FCF margins to 29% (which is below the analysts estimates of 37.2%) and you give META a 20x multiple on FCF then add back the cash (assuming no stock buybacks — obviously this is not accurate but it’s impossible to forecast) and assume 4% stock dilution (which gets them to 3.27B shares in 2026) then I’m coming up with a ~$368 price target in 2026 which is close to the all-time-high from last September.
This first chart shows that META is way below their 200d SMA and 200d EMA but still above the VWAP from the IPO. In fact this the closest that META has been to that VWAP since 2013. Just in case you’re wondering, that VWAP is $118.50 which is where I would definitely start a position (but use a stop loss).
As you can see from this next chart, there’s decent support in the low $120s going back to December 2018. If that level doesn’t hold up, the next area of support would likely be $114 and then $89. Personally I don’t think we ever see META under $100.
This last chart is META on a shorter timeframe chart, as you can see the stock has been in clear downtrend for the past 6 months with very clear upper and lower bands to this channel. If META can’t hold that $122 level from late 2018 it’s very possible we see a bounce off the bottom of this channel which might be around that $114 support price from December 2016.
My team decided to do this mini writeup as week ago but to be honest we might need to do a deep dive at some point because 3,000 words is not enough to tell the entire META investment thesis (bullish and bearish).
Like I said at the beginning of this writeup, I don’t have any position in META but I’m getting tempted to start one especially if there’s any possibility of TikTok being banned in the US. That would be an enormous catalyst for the stock price.
I also think META needs to consider some acquisitions. I think Shopify (SHOP) would be a no brainer (that stock is down -84% from the highs) but I doubt it would ever happens because the controlling SHOP shareholders would likely vote against it and/or the US regulators would probably block it. Assuming SHOP is a no-go, I think Pinterest (PINS) would also make alot of sense and same goes for Spotify (SPOT). Both of which have become more mature platforms with slowing growth but massive user bases.
Okay we’ll end it there even though I could keep writing about META for many more hours.
Hope you enjoyed this writeup on Facebook/Metaverse (META), if you have any questions about this writeup or any previous writeup, please don’t hesitate to reach out.
Jonah Lupton, CEO at Lupton Capital
Disclaimer: The stocks mentioned in this newsletter are not intended to be construed as buy recommendations and should not be interpreted as investment advice. Many of the stocks mentioned in my newsletter have smaller market capitalizations and therefore can be more volatile and should be considered more risky. I encourage everyone to do their own research and due diligence before buying any stocks mentioned in my newsletters. Please manage your portfolio and position sizes in accordance with your own risk tolerance and investment objectives.