Why did FB fall? -
In the market we are in, participants are looking for nothing but perfection. And FB’s quarter was everything but perfect.
Losing out to TikTok?
Daily active users declined for the first time, sparking the belief that FB are losing out users to TikTok. While this could be true, FB is vigorously trying to add reels to Instagram and will be rolling it out worldwide soon. In the past, stories (from Snapchat) were added to Instagram and adopted well by the users. However, reels monetize at lower rates than Feed and Stories and will cause a short-term decrease in profits; but will do only good for Meta in the long term.
Apple and Google:
Apple’s App Tracking Transparency feature would decrease the company’s 2022 sales by about $10 billion. Google will also add a similar feature in 2 years, which could negatively impact FB. However, according to Mark, Meta is rebuilding a lot of its ads infrastructure to continue growing and delivering high-quality personalized ads despite these changes.
Let’s brush through earnings -
Meta presented two new reporting segments.
Their social media apps like WhatsApp, Facebook, Instagram, and Messenger.
The second segment is Reality Labs, including virtual and augmented reality, related consumer hardware, software, and content.
Family of Apps:
Income for that segment increased by 44% year over year. According to the CFO, Meta expects first-quarter 2022 revenues to grow between 3-11% to $27 to $29 billion, showing that they are still highly profitable as a company. Importantly, Meta family daily active users reached 2.82 billion, increasing 8% year over year. Just to be clear, that is about 36% of the world’s population.
Reality Labs:
They lost $10.193 billion in 2021, as meta vigorously threw cash into
research and development to gain a significant market share of the
Metaverse. If you believe in the Metaverse, this is an excellent
investment from FB to gain market share of the Metaverse that other companies cannot as they simply don’t have the cash to invest as FB does. This gives them a great advantage and should play out well in the future. Net Income declined 8%, and EPS declined by 5%. But these were from higher costs to build the Metaverse.
If you aren’t bullish on the Metaverse, this is what Mark had to say about it:
We are focused on the foundational hardware and software that are required to
build an immersive internet that enables better digital social experiences than
anything that exists. People have spent more than $1 billion on Quest store content, helping virtual reality developers grow and sustain their business. We had a strong holiday season, and Oculus reached the top of the App Store for the first time on Christmas Day in the U.S.
We’re working toward a release of a high-end virtual reality headset later this year, and we continue to make progress developing Project Nazare, which is our first fully augmented reality glasses. And as for software,
Horizon is core to our metaverse division. I mean, this is our social VR world-building experience that we recently opened to people in the U.S. and Canada.
Value within FB:
In FY21, FB produced $38.4 billion in free cash flow, growing 36% YoY. They also have $48b in cash & short-term investments. FB is still one of the best cash generative businesses in the world. So, is their 50% drawdown justified?
Over the last 5 years, FB have grown revenues at an average of 30.5%. This is a absurd growth rate. If FB does even half of this at 15%, the stock is going to be soaring for the next couple years. To show how cheap FB, here is a bearish analysis of FB -
Assuming a 8%, 10%, and 12% revenue growth for the next 10 years, less than half of what FB averages, their fair value projection sits average of $453, a 120% increase in stock price. Worst case scenario of just 8% revenue growth and FB is still has almost 6% upside to it. Mark Zuckerberg is a smart capital allocator and won’t neglect the cash flow machines FB possesses. The Metaverse is something he envisions, but the family of apps will be what generates FB’s cash for the time being.
MASSIVE acquisition:
WhatsApp and Facebook Messenger are the two biggest messaging platforms in the world, and so far, add no revenue to FB. FB is trying to change that, with a recent acquisition of Kustomer, a customer service software company. Despite over a year of antitrust scrutiny, FB was able to pull off the acquisition off.
Kustomer builds software for businesses to manage customer messages from multiple services on a central dashboard. This is central to Meta’s plan to make money off WhatsApp and Messenger. This can be big for FB, and monetizing 2 billion active users on WhatsApp and 1.3 billion Messenger users on Facebook Messenger. Together, more than 120 billion messages are exchanged PER DAY on these platforms.
The great part about monetizing these platforms is that almost 100% of all revenue will be profit, since they are already being provided free of cost. Clearly, this is not priced into FB and can be a massive catalyst for them.
Bottom line:
Mohnish Pabrai recently said that at current valuations FB is an easy double with low risk. I think this thesis explains how this opportunity is low risk and high reward.
Although it’s never nice to see a stock lose almost half its value, let us zoom out. Meta is a STRONG growth stock. Despite recent troubles, I don’t think the long-term growth for FB’s core business is impaired. Moreover, at current valuations, there is a wide room for error.
