Meta Stock: Let's Shed Light On Some Misconceptions – Seeking Alpha
Meta (NASDAQ:META) has been the most hammered in the last year among the big tech companies as it has come to lose up to 77% of its market capitalization. The company is trapped in a vicious cycle where any news, positive or negative, is an excuse for further collapse. In my opinion, there are too many false myths around this company and in this article I will try to shed light and refute some of the most common convictions.
This is probably the statement I have heard most often, and is based on the fact that since the beginning of 2022 revenue growth has been practically nil and the same is expected for the future.
This conviction is based on a factual observation (revenues have struggled to grow this year), but I think it is incorrect to take it for granted that these difficulties will persist in the future. The possibility that Meta may resume growth should not be overlooked. The advertising industry is currently experiencing decreasing demand due to the current economic slowdown. Many companies are trying to cope with this difficult period by cutting unnecessary costs, and advertising is one of them.
As we can see from this chart obtained from Statista, this is certainly not the first time that the advertising industry has slowed its growth. It had already happened in 2001 during the bursting of the tech bubble, and in 2009 during the great financial crisis. Since then, however, there has been unstoppable growth that has only seen a slowdown during the pandemic. In the long run, the advertising industry tends to grow even though there may be various difficulties in the short to medium term, and that is what matters most. We are currently in one of those difficult times, but I am confident about its growth in the long run.
Looking in more detail at Meta’s core business, which is social media advertising, Statista estimates that advertising spending in 2022 will be $226 billion and will reach $384.90 billion by 2027. This is a CAGR of 11.24%.
Finally, to conclude this first paragraph, I want to point out one last aspect that often goes by the wayside.
It is true that revenues are struggling to grow in 2022, but we should not forget that in 2021 there was an increase of 37.20%. If we were to look at the 2020-2022 time frame, it would still be a CAGR of 16.30%. Personally, I do not think this is such a negative result, as Meta almost managed to match the excellent revenues in 2021 despite the countless difficulties in the advertising industry in 2022. To expect that Meta’s revenues can grow 30% every year is simply absurd, as well as to expect that they will never grow again. Every company is sooner or later in a time of difficulty, and that is when they are at a discount. By the time they are doing well it is probably too late to invest in them.
This is the belief that I personally believe has affected Meta’s collapse the most. Investment in Reality Labs is seen as a waste of money that will lead to nothing but a weakening of the financial structure. Some people believe that Mark Zuckerberg and his team are clueless, but they forget that this same team has managed to get about 3 billion users to connect to their apps on a regular basis. Throughout its history Meta’s acquisitions have always been criticized, but in the end they have always been right.
In 2014 Meta bought VR visor manufacturer Oculus for about $2 billion and especially in the last two years has been investing several billion in this area. Many people do not believe in a virtual reality-based future, but how many people 10 years ago believed that the future would be posting personal photos daily on a platform with billions of users? How many 10 years ago would have predicted that today it is almost more important to post photos of a lived experience than to live the experience itself? Probably not you and not me, but Mark Zuckerberg and his team did. That doesn’t mean Meta couldn’t have been wrong, but before you think this company would throw billions of dollars at something useless, it’s worth thinking twice since it has repeatedly refuted public criticism.
That said, let me now show you what these investments in the Reality Labs segment mean from a financial point of view. Many people believe that Meta’s rising CapEx is solely for the creation of the Metaverse, but this is actually a mistaken belief. In the last conference call Mark Zuckerberg was very clear about the allocation of investment capital, but clearly that was not enough.
We continue to direct the majority of our investments toward the development and operation of our Family of Apps. In Q3, Family of Apps expenses were $18.1 billion, representing 82% of our overall expenses. Family of Apps expenses grew 18% driven mostly by employee-related costs, infrastructure-related costs, and the impairment of certain operating leases for office facilities that we plan to exit. Our current surge in capex is largely due to building out our AI infrastructure and we would expect capex to come down as a percent of revenue over the long term.
So, 82% of the expenses are in the Family of Apps segment and only 18% of them in the Reality Labs segment. Furthermore, it was clarified that these are momentary investments, and that in the long run the operating margin will return as before if not higher. The company is currently investing heavily in new infrastructure that can support AI capable of increasing not only daily users in major apps but also the time users spend there. What’s more, Meta is also focused more than ever on monetizing WhatsApp and Messenger.
Beyond Reels, messaging is another major monetization opportunity. Billions of people and millions of businesses use WhatsApp and Messenger every day, and we’re confident we can connect them in ways that create valuable experiences. We started with Click-to-Messaging ads, which let businesses run ads on Facebook and Instagram that start a thread on Messenger, WhatsApp or Instagram Direct so they can communicate with customers directly. This is one of our fastest growing ads products, with a $9 billion annual run rate. This revenue is mostly on Click-to-Messenger today since we started there first, but Click-to-WhatsApp just passed a $1.5 billion run rate, growing more than 80% year-over-year.
Apparently, however, none of this matters to the market, which continues to think that Meta is spending everything in the Metaverse. Once again, this information asymmetry is just an opportunity to increase my position in Meta.
Of all of them, this is the statement that personally puzzles me the most, as I could not understand why this belief has become so popular. If for the previous two there was a kernel of truth, albeit distorted, in this case there is really no reason to believe that Facebook is an obsolete social network.
Meta Q3 2022
Facebook MAUs are increasing every quarter. It is true that Europe, US, and Canada have virtually stopped growing for years, but that is only because they are virtually all already Facebook users. Also, in terms of numbers, it is often forgotten that Rest of the World and Asia-Pacific are significantly larger and their growth is consistent every quarter. While counterintuitive, a large proportion of Facebook users come from the East and not the West. Same reasoning can be made with DAUs.
Meta Q3 2022
So, in light of these considerations, there is no reason to believe that Facebook is a dying social: engagement with this platform has never been higher. Instead, what is deteriorating is Facebook’s ability to generate revenue, but this problem is closely related to the first point already discussed in this article. The economic slowdown that is affecting the West is obviously affecting Facebook’s revenue per user as well, but I think it is absurd to think that there cannot be an economic recovery in the future. This is a short- to medium-term issue.
Meta Q3 2022
However, this observation does not apply to the Rest of the World and Asia-Pacific segments, where there was instead an increase in revenue per user compared to Q3 2021. Personally, I believe that it is these two geographic segments that will drive Meta’s growth in the future, as we are talking about emerging economies whose GDP is growing steadily. Out of all of them, India is the most important country for Meta’s future.
The purpose of this article is not to convince you to buy Meta, but simply to refute some of the most recurring convictions. I do not deny that there may be valid bearish theses on Meta, but I do not see how they can be based on the three themes previously discussed.
Finally, Meta’s price per share has increased by 30% in the last few days, which is a good sign of recovery, but I do not think is enough to decree the end of the negative sentiment. We are in the midst of a bearish market, and this sprint in tech stocks could turn out to be yet another dead cat bounce. I would not be surprised to see Meta at $70 per share in the coming months, but either way, my opinion would not change. From a long-term perspective, I am confident in this company and am ready to average down if the opportunity arises.
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Disclosure: I/we have a beneficial long position in the shares of META either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not a financial advice, just my humble opinion.