Meta's ups and downs over the years

Privacy storm and trust reconstruction

The first major setback Facebook encountered was the privacy leak scandal in 2018, in which a British data company called Cambridge Analytica abused Facebook's tens of millions of user data to influence political activities. The unexpected passage of the Brexit referendum in the UK became a far-reaching black swan. Although Cambridge Analytica's operations were not fully linked to the specific operational details of the Brexit campaign, its influence was widely discussed, triggering global attention to data privacy and social media regulation. Facebook was severely criticized by the public for its negligence in data management and was investigated by many governments. In the end, Facebook was fined a huge amount for violating user privacy, and Cambridge Analytica also announced its dissolution after the scandal.

After the second quarter earnings conference in 2018, Facebook's stock price plummeted by 23%, and some people asserted that Facebook's business model based on snooping on user privacy was irreversible. However, the company acted quickly and decisively invested billions of dollars to strengthen user privacy protection. At the same time, revenue continued to grow rapidly, and the operating profit margin remained generous, successfully regaining the trust of the market, and the stock price reached a new high again in less than a year.

Market value exceeds one trillion and the metaverse crisis

In 2021, with the Fed's massive release of money, Facebook's market value exceeded one trillion, realizing a stock market fairy tale that increased tenfold in nine years. This is a beautiful story. Every day, three billion people around the world stay in the company's social network matrix for more than an hour to share their most private emotions and wishes. The company recommends corresponding goods and services based on everyone's preferences. The online advertising market has soared from 10% in 2005 to more than 60% today. Facebook's revenue has grown along with the story, from less than $4 billion in 2011 to more than $100 billion, with an operating profit margin of more than 40%, a veritable money printing machine.

Although Facebook has successfully dealt with privacy issues and has emerged almost unscathed financially, the company's reputation has been damaged. At the end of 2021, Facebook changed its name to Meta, partly to express its determination to enter the metaverse, and partly because Facebook's name was poisoned. Who knew that the name change would usher in the biggest challenge since the company was founded.

In 2022, Meta's new story was questioned. People think that the metaverse is just a virtual space, but it is not a good business. The company talked a lot about related professional technology, but was very vague about the details of the business model related to it. Combined with the rapid growth of Tiktok's short video model at the time, which challenged Meta's social network moat, the online advertising market also showed cyclical weakness, and the company's stock price suffered an ankle cut, plummeting 77%. At the most pessimistic time, Mr. Market not only assumed that Meta's $10 billion invested in the metaverse would be wasted, but even that the company would not have any growth in the next 20 years until liquidation.

Restoration of market confidence and breakthroughs in AI technology

It turns out that Mr. Market was wrong. Meta's stock price soared in 2023. There are several reasons: 1. Concerns about excessive inflation and economic recession in the United States were disproven by strong economic growth, and the stock market corrected pessimistic expectations. 2. Giant companies have proved that they have sufficient pricing power and economic flexibility to increase service prices and transfer inflation to customers. Meta fired a large number of employees, while revenue was not affected and profits increased significantly. 3. Although interest rates have risen sharply, Meta is a money-making machine. It has no debt burden and cash can benefit from high interest. 4. Meta has taken some small actions to hit Tiktok, slowed down the pace of competitors, and established its dominant position in the online advertising market, achieving a winner-takes-all situation, and revenue and profits have soared again.

Entering 2024, market optimism spreads and Meta's stock price continues to rise sharply. At this time, as a value investor, you should remain calm and analyze the current narrative logic. Meta learned the lesson of not telling a good story during the Metaverse period. After making breakthroughs in large model technology, Meta aggressively purchased a large number of NVIDIA GPUs and launched the Llama series of large models, which were free and open source. This generous move greatly increased the company's popularity and favorability. Meta's latest Llama3 model has a terrifying amount of training data of 15T and uses more than 20,000 H100 graphics cards. The effect is close to the closed-source GPT4 model, which is another important milestone in the open source field. Meta has sufficient financial resources to support the extremely expensive large model training process. The open source strategy has brought competitive pressure to other closed-source large model companies. If other companies do not have a good business model, it will be difficult to keep up. Meta's large model has been widely used in its own product recommendations, advertisers' content generation and search result optimization. Even the Metaverse, which was previously stuck in a bottleneck, may benefit from multimodal large models and greatly reduce the cost of content production.

In addition to the Llama large model, Meta has actually been deeply involved in the field of artificial intelligence for many years. Especially in the field of computer vision, many important models come from Meta's FAIR Research Institute, such as the Segment Anything "segment everything" visual model, which can easily extract all objects in any picture and become an important foundation for many subsequent studies. Meta's greatest contribution is the Pytorch deep learning framework. With its ease of use very close to Python, it has surpassed Google's first-released Tensorflow and become the most popular research framework in the field of artificial intelligence.

Challenges and growth potential

However, Meta is not sitting back and relaxing. If the US economy eventually slows down in a high-interest environment, the online advertising market will inevitably be hit. At the same time, online advertising already accounts for two-thirds of the overall advertising market, and there is little room for further increase in the proportion.

Meta's future growth depends on its global influence. As global per capita wealth increases, if the application combination of Facebook, Instagram and Whatsapp can maintain a strong network effect in developing countries, then the growth potential is still great. Currently, active users in North America account for only 10% of the total number of users, but contribute about 50% of revenue. With the economic development of Asian countries such as India, Vietnam, and Thailand, local consumers will also have stronger purchasing power, and the population there is very young and naturally embraces the Internet. Online advertising will be very profitable in those regions.

Reasonable valuation and future prospects

Finally, let's discuss the reasonable valuation of Meta. This is a metaphysical question, and it depends on one's own opinion. Meta's social network has a very wide economic moat and has exponential self-reinforcement capabilities. Many challengers have tried to challenge its position, including Google, Snapchat, and Tiktok, and have all failed. As can be seen in the figure below, Meta's revenue and profits have grown rapidly over the years since its listing, and its return on investment capital ROIC has remained at around 20%. The profit margin is very high and it is easy to make money. Therefore, it is assumed that the company can maintain stable growth for many years to come. Here, the classic two-stage free cash flow valuation model is used. The current company's earnings per share is US$15.2, and the annual growth rate of earnings per share in the next five years will be 20%. The annual growth rate of earnings per share in the next five years will be reduced to 15%. The company continues to repurchase without dividends, and the investor's target return rate is 15%. The price-earnings ratio is 25, and the reasonable stock price is calculated to be US$470. This result is not far from the $445 estimated by valuation guru Professor Damodaran and the current market price. It can be considered that Meta’s current valuation is within a reasonable range.