Meta Platforms, Inc. Fundamental Analysis

Disclaimer: This article by The Globetrotting Investor is general in nature. We aim to bring you long-term focused analysis driven by fundamental data, hence, providing you commentary based on historical data and analyst forecasts only using an unbiased methodology. This is not a buy/ sell recommendation, and it is solely for educational purposes. Please do your research before investing. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Please read the full disclaimer here.

Meta Platforms, Inc.

Last Updated: 24 Feb 2024

NASDAQ: META

GICS Sector: Communication Services

Sub-industry: Internet Content & Information

https://investor.fb.com

You can download a summary of Meta Platforms, Inc' fundamental analysis in PDF here.

Management

Meta Platforms, Inc. Management

CEO: Mark Zuckerberg

Tenure: 19.6 years

Meta Platforms, Inc.’s management team has an average tenure of 3.2 years. It is considered experienced.

Business Overview

Meta Platforms, Inc. Business Overview

Meta Platforms Inc.’s mission is to give people the power to build community and bring the world closer together.

To achieve that, they develop products facilitating connection, learning, and sharing among users across devices and audiences.

Meta's goal is to move beyond 2D screens and towards immersive experiences like augmented and virtual reality to help build the metaverse. The company envisions the metaverse as the future of social interaction and computing. It will be an ecosystem of experiences, devices, and technologies that revolutionize social technology.

The company operates in two segments: Family of Apps (FoA) and Reality Labs (RL).

Family of Apps

Meta's main source of revenue is from selling advertising placements on their family of apps. These ads allow marketers to reach people for various marketing objectives such as lead generation and driving awareness.

These apps are products that we are all familiar with. Let us briefly talk about each of them.

Facebook: The app fosters global community by facilitating the creation of communities, enabling individuals to share experiences, engage in discussions, build relationships, explore interests, and generate economic opportunities through features like Feed, Reels, Stories, Groups, and more.

Instagram: Instagram enhances connections with loved ones and interests through features like Feed, Stories, Reels, Video, Live, Shops, and messaging, enabling users to interact, showcase themselves, explore, and shop from preferred businesses.

Messenger: Messenger is a messaging application for people to connect with friends, family, communities, and businesses across platforms and devices through text, audio, and video calls.

Threads: Threads is a text-based updates and public conversations app where communities discuss topics of interest. Users can connect, engage with like-minded individuals, and build a following to share ideas, opinions, and creativity.

WhatsApp: A messaging application that is used by people and businesses around the world to communicate and transact privately.

Reality Labs

Meta's investment in the metaverse involves a long-term strategy focusing on exploring and developing emerging technologies like neural interfaces and AI-based innovations. These advancements aim to shape next-generation interfaces and immersive experiences.

By investing in these technologies through their augmented and virtual reality products, the company is preparing for the future of social technology, which they believe will be centred around the metaverse. However, the development of the metaverse ecosystem is inherently difficult to predict, and it is uncertain when and how it will fully emerge.

Currently, this segment generates revenue from sales of consumer hardware products, software, and content.

The product offerings consist of the Meta Quest virtual reality devices, software, and content available through the Meta Quest Store. These products enable a variety of social experiences, such as gaming, fitness, and entertainment, which allow people to connect regardless of physical distance.

They have also launched Horizon Worlds, a social platform where people can interact with friends, play games, attend virtual events, and meet new people.

Meta has expanded its augmented reality (AR) roadmap, introducing Ray-Ban Meta smart glasses featuring Meta AI and live-streaming capabilities. Moreover, Meta Spark allows creators to merge digital and physical worlds through AR experiences.

Meta Platforms, Inc. Reportable segments include Family of Apps and Reality Labs.

Meta Platforms, Inc. Reportable Segment Revenue for the FY ended 31 Dec 2023. Source: Gurufocus

Meta Platforms, Inc. revenue from these geographic areas of Asia-Pacific, Europe, United States, Canada, China and Rest of the World.

Meta Platforms, Inc. Revenue Geographic Breakdown for the FY ended 31 Dec 2023. Source: Gurufocus

Trends, Competition, and Strategy Overview

Meta is shifting its focus from traditional 2D screen-based experiences towards immersive technologies like augmented and virtual reality. This move aims to contribute to the development of the metaverse, which the company believes is the future of social interaction.

With that aim, the company prioritizes investments in six key areas: AI, the metaverse, content discovery, product monetization, regulatory compliance, and developer efficiency.

Meta uses AI across various products and services, including content ranking, recommendations, and advertising tools. Furthermore, enhancing developer efficiency helps to build, iterate, and optimize products quickly.

The company directed most investments towards its core app portfolio.

In 2023, Meta spent 80% of its total costs and expenses on FoA. This includes developing its core apps, advertising services, data centers, and technical infrastructure. The company spent the remaining 20% on RL which funded investments in metaverse technologies like VR/AR devices, social platform software, and neural interfaces.

Meta acknowledges the challenges in predicting the metaverse's development. They expect the segment to incur losses in the near future, and it is dependent on funds from other areas of business.

Despite all these financial uncertainties, they stay committed to their long-term investment as they believe that the metaverse is the future of the internet.

While the company's metaverse investments encompass both short-term and long-term goals, the focus differs across segments.

Virtual reality (VR) and social platforms see a balance between near-term product development and long-term vision, while AR efforts prioritize long-term research and development. This is reflected in their planned spending allocation for 2024: 50% on AR, 40% on VR/ mixed reality (MR), and 10% on social platforms and other initiatives.

Meta operates in a competitive environment marked by rapid innovation and disruptive technologies. Competitors include established players in the areas of social media, communication, online advertising, and hardware manufacturing.

Moreover, the company expects to face competition from emerging technologies and players within the metaverse and other evolving fields. This dynamic demands continuous efforts to attract and retain users, businesses, developers, and partners while navigating the evolving landscape.

Meta Platforms, Inc. Trends, Competition, and Strategy Overview

Meta Platforms, Inc. Economic Moat

There are many ways to identify Meta Platforms, Inc.’s economic moat, but I focus on these 5 sources. The rating is purely subjective and is based on my in-depth understanding of the company.

Meta Platforms, Inc. has a wide economic moat. This is based on its intangible asset, cost advantage, efficient scale, network effect and switching cost.

Meta Platforms, Inc. Economic Moat

Economic Moat: Wide

Meta’s wide economic moat stems from its intangible assets, network effect and a little bit of switching cost.

Let’s talk about its intangible assets first.

Intangible assets do not always relate to branding. For Meta, it is its massive user data. The company has collected extensive data on its users' demographic information, interests, browsing history, and billions of photos and videos.

Leveraging its vast user data, the company personalizes user experiences with highly relevant content. This creates a feedback loop, enhancing the data's value.

Such intangible assets create unique advertising opportunities.

The company uses this data to improve its advertisers' ads, allowing advertisers to post more effective ads, leading to a higher return on investment. This attracts more advertisers to the platform.

Meta's rapid growth in average revenue per user over the past five years proves the value of its user data. This shows that advertisers are willing to pay premium prices for ad placement on the platform due to the data-driven targeting capabilities it offers.

While the regulation and enforcement of antitrust laws could potentially threaten Meta's intangible assets, any restrictions on data access and usage would affect all companies, not just Meta.

Besides Meta’s intangible assets, the company’s dominance in the social media market, through its various platforms including Facebook, Instagram, Messenger, and WhatsApp, has strengthened its network effects.

This means that as more people join and use these platforms, they become more valuable to the users. Newly added features on these platforms also help keep users within the ecosystem.

These network effects create barriers to entry for new social networks, as well as barriers to exit for existing users who may lose connections, pictures, and memories if they switch to other platforms.

Furthermore, Meta benefits from a moderate switching cost.

While users can easily join other platforms, the potential loss of data, contacts, and established connections can create friction, discouraging them from fully switching away. This, combined with user inertia, contributes to the strength of Meta's ecosystem.

Meta Platforms, Inc. Performance

My quick performance checklist:

Has Meta Platforms, Inc.'s revenue consistently grown year over year for the past 5 years? Yes.

Is the net income consistently increasing year over year for the past 5 years? Inconsistent as it declined by 40% from fiscal year 2021 to 2022 before bouncing back higher in 2023.

Has the cash flow from operating activities shown consistent year-over-year growth for the past 5 years? Inconsistent as it declined by 12% from fiscal year 2021 to 2022 before bouncing back in higher 2023.

Has the free cash flow remained positive for the past 5 years? Yes.

Is the gross margin % consistent or growing over the past 5 years? Yes.

Has the EPS shown growth over the past 5 years? Inconsistent due to earnings decline in the fiscal year 2022.

The company reported a 16% year-over-year increase in total revenue to $134.90 billion in 2023, driven by a 28% increase in ad impressions delivered across its Family of Apps. This growth was partially offset by a 9% decrease in the average price per ad.

Besides reporting its revenue and net income, it is also important to consider other metrics of Meta’s Family of Apps.

Meta's Family of Apps boasted 3.19 billion daily active users in Dec 2023, an 8% increase year-over-year. This translates to 3.98 billion monthly active users, a 6% annual rise.

Furthermore, the company reported a 9% increase in its annual worldwide average revenue per user (ARPP) in 2023, reaching $34.72.

Meta Platforms, Inc.'s financial performance which includes its revenue, net income, operating cash flow, and FCF over the recent 5 years.

Meta Platforms, Inc. Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)

Has the free cash flow per share increased over the last 5 years? Inconsistent due to cash flow decline in the fiscal year 2022.

Meta Platforms, Inc.'s free cash flow per share has been inconsistent for the past 5 years.

Meta Platforms, Inc. FCF per Share

Management Effectiveness

Has Meta Platforms, Inc.'s ROE stayed within or above the 12%-15% range year over year for the past 5 years? Yes.

Meta Platforms, Inc. Management Effectiveness

Meta Platforms, Inc.'s ROE is above its industry average ROE.

Meta Platforms, Inc. Return on Equity

Has the ROIC stayed within or above the 12%-15% range year over year for the past 5 years? Yes.

Meta Platforms, Inc. ROIC is more than its WACC.

Meta Platforms, Inc. Return on Invested Capital vs Weighted Average Cost of Capital

The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.

Meta has a share repurchase program for its Class A common stock, allowing them to buy back their shares. Since 2017, they have repurchased over $30 billion in shares, with $80.93 billion currently authorized for future repurchases.

The timing and amount of share buybacks depend on factors like price, market conditions, and investment options.

The number of Meta Platforms, Inc. shares outstanding has been declining over the past 5 years.

Meta Platforms, Inc. Shares Outstanding (Million Shares)

Meta Platforms, Inc. Financial Health

Meta Platforms, Inc. balance sheet which includes total equity, total debt, and cash & short-term investments.

Meta Platforms, Inc. Financial Health (USD Million)

Current Ratio: 2.7 (pass my requirement of >1.0)

Debt-to-EBITDA: 0.63 (pass my requirement of <3.0)

Interest Coverage: 104.8 (pass my requirement of >3.0)

Debt Servicing Ratio: 0.6% (pass my requirement of <30.0%)

Meta Platforms, Inc. Stock Performance

The following graph shows a comparison of the cumulative total return for Meta Platforms, Inc.’s Class A common stock, the Dow Jones Internet Composite Index (DJINET), the Standard & Poor's 500 Stock Index (S&P 500) and the Nasdaq Composite Index (Nasdaq Composite) for the five years ended 31 Dec 2023.

The graph assumes that $100 was invested at the market close on the last trading day for the fiscal year ended 31 Dec 2018 in the Class A common stock of Meta Platforms, Inc., the DJINET, the S&P 500, and the Nasdaq Composite and data for the DJINET, the S&P 500, and the Nasdaq Composite assumes reinvestments of gross dividends.

Meta Platforms, Inc. Stock Performance

Stock Performance. Source: Meta Platforms, Inc. 10K

Meta Platforms, Inc. Intrinsic Valuation

Estimated intrinsic value: USD $431.81

Value is calculated using the discounted cash flow method (considering their cash and debt) and scenario planning.

Average free cash flow used: USD $36,000M

Projected growth rate: 12% - 18%

Beta: 1.1

Discount rate: 8.5%

Ideal margin of safety: 25% (Uncertainty: Mid)

Price range after the margin of safety: <USD $324.00

Date of calculation: 24 Feb 2024

Meta Platforms, Inc. Intrinsic Valuation

Meta Platforms, Inc.'s valuation is based on the discounted cash flow method. A fundamental analysis by Ben, The Globetrotting Investor.

Meta Platforms, Inc. Valuation

I use the past 5 years' free cash flow and apply a weighted average, giving more focus on the recent years. I then round the average to the nearest tens. In some instances, I use a more realistic number to represent the free cash flow.

The total debt and cash and short-term investments are the last quarter figures that are rounded to the nearest tens. In some instances, I use more realistic numbers to represent them.

Meta Platforms, Inc. estimated fair value and its 52-week range.

Meta Platforms, Inc. Intrinsic Valuation

Comparison of Meta Platforms, Inc. price-earnings ratio against its five closest industry peers.

Meta Platforms, Inc. Relative Valuation

Meta Platforms, Inc. Price-Earnings Ratio vs its Peers

Meta Platforms, Inc.'s price-earnings ratio for the past 5 years and its 5-year average.

Meta Platforms, Inc. Historical Price-Earnings Ratio

Additional Resources

I recommend reading The Five Rules for Successful Stock Investing as it greatly helps in my stock analysis. If you want a complete collection of recommended books, please visit here.

My Concerns

Meta’s revenue depends solely on marketer ads.

These marketers don't commit long-term and often use only a small portion of their budget. Their continued business will then rely on effective ad delivery, competitive returns compared to other options, and overall satisfaction.

As such, implementing changes to user data practices, in compliance with regulations, will reduce the company's ability to effectively target ads and is already harming its ad business.

Mobile ads have predominantly driven Meta's revenue for the last five years.

But this income depends on factors beyond their control, like device trends, platform updates, and relationships with device manufacturers and operating systems.

For example, changes by platforms like Apple and Google, impacting ad targeting and measurement, already hurt monetization and could worsen. Maintaining good relationships with these players and adapting to evolving mobile standards are also crucial.

Meta faces stiff competition for users and revenue.

Adding and retaining engaged users on key platforms like Instagram is vital for Meta's success. However, declining user engagement and monetization could make their products less attractive.

Furthermore, Meta faces significant competition across all aspects of its business, particularly in attracting and retaining users and advertising revenue.

These competitors may offer similar or more accepted products, features, or services, or adopt aggressive pricing strategies. While Meta can try to counter these threats, success is not guaranteed.

Meta faces a complex regulatory landscape, both domestically and internationally, with laws and regulations related to privacy, data protection, and advertising.

For example, some countries are investigating and suing WhatsApp because of its terms of service and privacy policy. This could make it harder for WhatsApp to share information between its different apps and target users with ads.

All these factors may increase the cost of operations, decline user growth or engagement, or otherwise harm Meta’s business.

While Meta enjoys a wide economic moat, I expect more consistency from its performance. Nonetheless, the company demonstrates excellent capital allocation and maintains a healthy balance sheet.

Despite these strengths, there is an undeniable uncertainty surrounding its competitive landscape. Therefore, if you are considering investing in Meta, applying at least a 25% margin of safety when calculating your entry point is crucial to account for potential downside and build a buffer for future volatility.

My Concerns

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Meta Platforms, Inc. Fundamental Analysis