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I’ve shared more of my thoughts on Meta Platforms (FB), previously under the name Facebook, than any other company here in Search of Alpha. I express my optimistic views on why the stock is set to deliver returns that outperform the market given the disproportionate growth/valuation relationship.
If you’ve been a Meta contributor like me for quite some time now, you know that holding a stock can be very stressful. From the days of Cambridge Analytica to the constant scrutiny that the company endured, Meta shares have struggled to find momentum or attract higher valuation multiples, with the market feeling like it’s “interrupting” the stock.
At the same time, however, my primary consideration regarding the stock’s continued undervaluation has remained correct. This means that Meta’s continued growth leads to inventory eventually becoming very cheap, and eventually moving to a new plateau. Then it trades flat for a while until it becomes very difficult to ignore the valuation back against the growth of the company’s net income, which leads to another pump and so on.
It looks like the situation will repeat again in the coming months, with Meta growth significantly outperforming the stock.
The dominance of Meta Platforms advertising is unparalleled
The latest Meta Platforms results once again reinforce why the company’s platforms are so important to advertisers, with its growth remaining as strong as ever. This is evidenced by two primary, and at the same time, the most important metrics: user growth and ARPU growth.
The number of MAUs reached 2.91 billion, an increase of 6% year-over-year. I have warned in the past that the double-digit MAU growth in the Meta will eventually drop to single digits. However, I find it impressive that MAUs continue to expand, considering that more than a third of the Earth’s population are already using their suite of applications.
Source: Investor Presentation
The other metric, and even more exciting, is the number of dollars Meta can extract from each individual. The company’s average revenue per user (ARPU) has doubled over the years, and that should continue to be the case for years to come (more on that later).
Source: Statesman
In the previous quarter, Meta ARPU on its suite of apps once again recorded an impressive growth of 26.7% to $10.00.
Source: Investor Presentation
What will continue to drive ARPU growth:
In my view, Meta is well positioned to continue growing average ARPU earnings over time for two reasons:
- The oligopolistic nature of the company with a few other platforms forces advertisers to continue using their platforms by default. Meta platforms remain the best/best choice for advertisers, generating great returns on ad spend.
- The increasing need of advertisers to display their ads to a limited number of users and limited time to pass the user increases the cost of advertising, which fuels the growth of ARPU. For example, CPM was around $3.23 in 2016, $5.96 in 2017, about $7.19 in 2020, and $14.71 as of November of 2021! Simply put, digital real estate is limited, and Meta is the biggest owner in the social media space.
How long will Meta Platforms dominate the advertising space?
The interesting question now is whether Meta will maintain its current monopoly position and whether other platforms are in a position to capture a portion of the market share.
These platforms can be Pinterest (PINS), Snap (SNAP), ByteDance (BDNCE) TikTok. While the data for the latter is somewhat restrictive, I can only comment on the other data. In my view, while these platforms have a niche in the market due to their niche features (we’re actually long Pinterest), they don’t strictly compete with Meta.
Pinterest, for example, is a great platform, but its demographics are less advertiser friendly. More than 77% of Pinterest users are female, which makes it difficult to use general and non-exclusive ads, while about 51.2% of its total users reside outside the US, and this translates to poor consumer purchasing power, which again means less incentive for advertisers To choose across various Meta platforms.
So why Meta’s revenue growth has remained so impressive shouldn’t be a mystery.
Prospective Earnings Growth and Meta Evaluation (Short-Term Uptrend)
As shown below, the actual deviation of Meta earnings against the consensus estimates has not only been broad, but has widened even more recently. This is quite strange because Meta is one of the most well covered stocks globally, with plenty of information for experts to predict which estimates will come close to their actual results.
If the deviation is anywhere from 5% to 10%, it shouldn’t be surprising. But anything above 20% and even closer to 30% – 40%, as has been the case over the various seasons for the past two years, is just plain weird.
It seems as if Meta’s continued growth doesn’t even matter to the market. This is reflected in both the stock’s valuation and the expected EPS growth after all.
First, note that Meta is trading at a P/E multiple of 25. At the same time, this is a company that is growing on average by about 30% annually. This multiplier is already cheap enough to push the stock higher, as we discussed at the beginning of this article. However, note that Meta’s forward valuation is also based on analysts’ estimates of earnings per share for fiscal year 2022 of $14.41.
This is quite strange in its own way, as it indicates that earnings per share will grow 3.2% next year. Let’s take a pause here.
This makes no sense at all. This year-over-year growth assumes earnings per share for fiscal 2021 of $13.96, likely higher primarily after another beat on earnings in Facebook’s upcoming FQ4 results. After that, it’s nearly impossible to achieve 3.2% annual earnings growth, even if Meta revenue growth slows dramatically. You might argue that the company’s increased spending on the Metaverse will limit EPS growth for a while. But this is not the case. In third-quarter results, Meta’s chief financial officer stated that:
We expect our investment in Facebook Reality Labs to reduce our overall operating profit in 2021 by approximately $10 billion.
…and later in the earnings call:
We are committed to achieving this long-term vision, and we expect to increase our investments in the next several years.
In fact, this amount is set to grow in the future. The point, however, is that these expenditures are already priced in in the fiscal year 2021 results. Even if Reality Labs spending grows year-on-year with revenue growth (say 25%-35% in the coming years), which may The stagnation in net income growth during this period means EPS is still on the cusp of further growth backed by Meta share buybacks alone.
As you can see, Meta is ramping up the pace of its stock buybacks, which nearly doubled sequentially in the last quarter. Now any reasonable person would assume that this trend will continue in the future (which, by the way, indicates earnings growth in itself). But, let’s be very careful and assume that buybacks remain stable, which translates to an annual rate of $60 billion based on last quarter numbers.
According to the company’s current market capitalization, Meta will buy back about 6.37% of its shares. This translates into double the EPS growth forecast for next year assuming the company reinvests every dollar of its organic growth back into Reality Labs. Therefore, the stock is actually cheaper on a forward basis, relative to the futures P/Es we get based on analyst estimates. Hence, I can easily see the stock explode soon as its upcoming results continue to deliver better than expected earnings growth, causing the stock to become undervalued.
Note that I’ll leave some meta properties that alone can expand the rating. This includes a company with a cash position of $58 billion and long-term debt of $0.
Metaverse Chance (Long Term Uptrend)
Many investors are confused about the Metaverse. When one thinks of the Metaverse, one can probably imagine someone wearing a VR helmet on their head for hours (or days in the future?) similar to La Red Player One. While this can partly be an element of the Metaverse experience, in the long run, the Metaverse as a whole is more diverse and, surprisingly to many, is already there to some extent in the long run.
Most people spend countless hours in front of their screens these days, and virtual items/themes are becoming the new social currency. When players buy virtual items in video games to show off to their friends, it’s not the same as people who wear luxury brands in real life. It is a form of expression and communication.
Once you understand why it’s useful to do things virtually (easy example: virtual meetings), you just have to incorporate real-life behavior into the behavior of the Metaverse. In other words, people will spend money to wear their virtual character (avatar) a certain clothing brand (eg, Ralph Lauren (RL)) in virtual meetings.
Remember that this is already happening. If players spend $10 to buy a single skin for their virtual warrior in one game, you can bet they’ll spend more on an avatar that actually matches their real-life characters. Add NFTs to the mix, and the Metaverse goes wild. Similar to the way your car, home, and garden design says something about who you are (or who you see yourself anyway), I bet your Metaverse NFT portfolio means a lot more than real-life representations.
If you see that your NFT group consists of one particular NFT that allows you to sit in the front row of a Laker game occasionally, another NFT that lets you dine with your favorite artist once a year, and another that allows you to your virtual avatar to get the latest items Nike virtual earlier than other users, I can tell more about you compared to the realistic adoption of this concept.
I won’t get technical in this aspect because the article is going to be completely derailed, but once you understand why the Metaverse will be bigger than the current state of social media, its entire case/prospects becomes very clear. That’s what we’re already doing, but on steroids. And to assume that Meta, the company with the largest user base globally and (one of) the company(s) with the most data on all of us, is going to be one of the dominant forces in the space, is natural. .
Predicting the financial impact of the Metaverse on Meta over the next decade would be illogical, although one can imagine a myriad of potential revenue streams (more advertising, brand deals, royalties from smart contracts through NFTs). The truth is that no one can know what the actual numbers will look like. However, Meta already has the largest infrastructure among all likely to take advantage of this phenomenon.
However, my point of view in this article is that regardless of the future benefits of the Metaverse, the company is already attractive enough on its own to have significant upside potential going forward based on the current trajectory of its financial positions.
For this reason, we see Meta Platforms as a stock with a significant upside in the short term due to its valuations and its modest future valuation, as well as a significant long-term upside from the metaverse story, which looks like an inevitable transition towards social media 2.0.