Meta, what's happening to you?
1. $Meta Platforms(FB.US$ Meta's 25% plunge in its share price has got many investors' attention. It is rare to see a big blue chip company suffering such a major decline. In fact, it broke a record by having the worst one-day drop in value of any US company. Meta lost about $250b while Zuckerberg saw $31b wiped out from his net worth all in a day.
2. Let's figure out what's going on. First, the revenue growth rate has slowed to 20% in the fourth quarter and earnings were lower than a year before. So the last quarter results were poor and below market expectations. It doesn't help when other competitors are posting good results. Alphabet posted 32% revenue growth while Snap's revenue jumped 42% in their latest quarter.
3. Second, Facebook Daily Active Users have decreased by 1m between Q4 and Q3. Facebook is the key revenue driver for Meta - retaining users and having Facebook as a social media of choice is key to attracting advertisers. A reduction causes concerns for some investors, especially with new competition coming up.
4. Third, the guidance for 2022Q1 was discouraging - 3% to 11% growth to be expected. That is even lower than the recent quarter's 20% growth.
5. What are some of the possible reasons for the poor performance? Zuckerberg cited increased competition for leisure time and that there are more social media platforms like TikTok taking away some of the attention.
6. The next possible reason is the impact of the iOS privacy which has made it harder for advertisers to target iPhone users on Facebook. This could result in advertisers curtailing some budget as the ads become less effective.
7. Investors are fearing that the increased competition and iOS impact are going to affect Facebook going forward and the weak guidance is just confirming their fears. But I think there are some knee-jerk reaction here.
8. Social media platforms stick with a particular generation. For now, here's a generalisation:
Boomers: YouTube
Gen X: Facebook
Gen Y: Instagram
Gen Z: TikTok
Primary schoolers: Roblox
Toddlers: YouTube
9. Meta is able to capture two generations of users and it is already the most populous place on Earth with close to 3 billion users. Yes, you would have some users crossing over to the younger platforms but majority would still stick with the platform that they are used to. This means that there will always be businesses paying to reach Facebook or Instagram audiences. New competition don't take away all the eyeballs, they mainly attract a new generation. What Meta is losing out is that they couldn't bring on the younger ones. Hence, moving one step ahead into the metaverse is crucial for Meta.
10. Apple and Google are the gatekeepers in the mobile era because of iOS and Android. They have the say about what the apps can or cannot do. As we have seen that iOS could affect Facebook by preventing the latter from tracking users. Google could hurt Facebook further by going the same way with Android. Facebook didn't succeed with the Facebook Phone and it is a strategic move into the hardware business with Oculus. It is hoping that the VR device can be one of the gatekeepers for the metaverse. However, Oculus is abandoning its own XROS and using Android instead. Seems like it has been a struggle in this aspect.
11. Valuation of Meta should come down because of these problems. But by how much? Let's compare among the MAMAA family. It is relevant because of their status and importance to the stock market even though they have different businesses.
12. Meta: PS 8x and PE 23x; 1y rev growth +37%
Alphabet: PS 8x and PE 26x; 1y rev growth +41%
Microsoft: PS 13x and PE 33x; 1y rev growth +21%
Amazon: PS 3x and PE 59x; 1y rev growth +22%
Apple: PS 8x and PE 29x; 1y rev growth +29%
13. We can see that Meta is trading pretty close to Alphabet's valuation and it is logical since they both rely heavily on ad revenue. This might just mean that the 25% decline in Meta's share price is largely justifiable and investors are benchmarking the two ad giants together. So Meta was previously overvalued as compared to Alphabet. There is a small degree of knee jerk reaction though. If we use Alphabet's PEG ratio as a reference point, Meta fair price should be $277, about 16% higher.
14. In summary, Meta is facing some problems and are not easy to solve. But at the same time, their revenue and earnings will continue to roll in as they have captured two generations of users. With slowing growth, it is only reasonable to lower valuation. That said, the 25% drop was probably too much.
2. Let's figure out what's going on. First, the revenue growth rate has slowed to 20% in the fourth quarter and earnings were lower than a year before. So the last quarter results were poor and below market expectations. It doesn't help when other competitors are posting good results. Alphabet posted 32% revenue growth while Snap's revenue jumped 42% in their latest quarter.
3. Second, Facebook Daily Active Users have decreased by 1m between Q4 and Q3. Facebook is the key revenue driver for Meta - retaining users and having Facebook as a social media of choice is key to attracting advertisers. A reduction causes concerns for some investors, especially with new competition coming up.
4. Third, the guidance for 2022Q1 was discouraging - 3% to 11% growth to be expected. That is even lower than the recent quarter's 20% growth.
5. What are some of the possible reasons for the poor performance? Zuckerberg cited increased competition for leisure time and that there are more social media platforms like TikTok taking away some of the attention.
6. The next possible reason is the impact of the iOS privacy which has made it harder for advertisers to target iPhone users on Facebook. This could result in advertisers curtailing some budget as the ads become less effective.
7. Investors are fearing that the increased competition and iOS impact are going to affect Facebook going forward and the weak guidance is just confirming their fears. But I think there are some knee-jerk reaction here.
8. Social media platforms stick with a particular generation. For now, here's a generalisation:
Boomers: YouTube
Gen X: Facebook
Gen Y: Instagram
Gen Z: TikTok
Primary schoolers: Roblox
Toddlers: YouTube
9. Meta is able to capture two generations of users and it is already the most populous place on Earth with close to 3 billion users. Yes, you would have some users crossing over to the younger platforms but majority would still stick with the platform that they are used to. This means that there will always be businesses paying to reach Facebook or Instagram audiences. New competition don't take away all the eyeballs, they mainly attract a new generation. What Meta is losing out is that they couldn't bring on the younger ones. Hence, moving one step ahead into the metaverse is crucial for Meta.
10. Apple and Google are the gatekeepers in the mobile era because of iOS and Android. They have the say about what the apps can or cannot do. As we have seen that iOS could affect Facebook by preventing the latter from tracking users. Google could hurt Facebook further by going the same way with Android. Facebook didn't succeed with the Facebook Phone and it is a strategic move into the hardware business with Oculus. It is hoping that the VR device can be one of the gatekeepers for the metaverse. However, Oculus is abandoning its own XROS and using Android instead. Seems like it has been a struggle in this aspect.
11. Valuation of Meta should come down because of these problems. But by how much? Let's compare among the MAMAA family. It is relevant because of their status and importance to the stock market even though they have different businesses.
12. Meta: PS 8x and PE 23x; 1y rev growth +37%
Alphabet: PS 8x and PE 26x; 1y rev growth +41%
Microsoft: PS 13x and PE 33x; 1y rev growth +21%
Amazon: PS 3x and PE 59x; 1y rev growth +22%
Apple: PS 8x and PE 29x; 1y rev growth +29%
13. We can see that Meta is trading pretty close to Alphabet's valuation and it is logical since they both rely heavily on ad revenue. This might just mean that the 25% decline in Meta's share price is largely justifiable and investors are benchmarking the two ad giants together. So Meta was previously overvalued as compared to Alphabet. There is a small degree of knee jerk reaction though. If we use Alphabet's PEG ratio as a reference point, Meta fair price should be $277, about 16% higher.
14. In summary, Meta is facing some problems and are not easy to solve. But at the same time, their revenue and earnings will continue to roll in as they have captured two generations of users. With slowing growth, it is only reasonable to lower valuation. That said, the 25% drop was probably too much.
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Venture118 : ThankU for some insight… good read
Sianzsation : 62% of IPhone users allow app tracking. This is still a saving grace.
102760870 : Nice review yet non biased comments
Upncoming1841 : Am I correct to say that there is a possibility of Android implementing the same privacy setting as IOS? If so, this will be another potential huge hit for social media companies like meta.
Sianzsation Upncoming1841 : Definitely possible of it on Android. When that happens god knows what happen to FB, they no longer have a compeitive moat.
It would be better to invest in a company that has a strong moat then invest in a company which has more revenue yet no moat. That's my opinion.
Upncoming1841 Sianzsation : Noted with Thanks. Then meta would be at the mercy of the Android gatekeeper. This is a big black dark cloud.
Cow Moo-ney : Great read!