I have shared my thoughts on Meta Platforms (FB), previously under the name Facebook, more than any other company here on Seeking Alpha. I have expressed my bullish views on why the stock is set to produce market-beating returns due to its disproportional growth/valuation relationship.
If you have been a Meta shareholder like myself for quite some time now, then you know that holding the stock can be quite exhausting. From the days of Cambridge Analytica to the constant scrutiny the company has suffered, Meta's shares have struggled to find momentum or attract higher valuation multiples, with the market giving off the feeling that it is "boycotting" the stock.
Simultaneously, however, my fundamental consideration regarding the stock's consistent undervaluation has remained true. That is, Meta's enduring growth results in the stock eventually becoming too cheap, eventually breaking out to a new plateau. It then trades flat for a period until the valuation again becomes too hard to ignore against the company's net income growth, leading to another pump and so on.
Meta Platforms' advertising dominance is unparalleled
Meta Platforms' latest results once again solidified why the company's platforms are critical for advertisers, with its growth remaining as robust as ever. This is illustrated through Meta's two fundamental, and at the same time most important, metrics: User growth and ARPU growth.
MAUs were 2.91 billion, an increase of 6% year-over-year. I had warned in the past that Meta's double-digit MAU growth would eventually decline to the single digits. Still, I find it quite impressive that MAUs continue to expand, considering that more than 1/3 of Earth's population already utilizes its family of apps.
Source: Investor Presentation
The other, and more exciting metric, is how many dollars Meta is able to extract from each individual. The company's ARPU (Average Revenue Per User) has been snowballing over the years, and this should continue to be the case for years to come (more on that later).
In the previous quarter, Meta's ARPU on its family of apps once again posted fantastic growth of 26.7% to $10.00.
What will keep driving ARPU growth:
In my view, Meta is well-positioned to continue growing its ARPU over time for two reasons:
- The company's oligopolistic nature relished with a handful of other platforms forces advertisers to keep utilizing its platforms by default. Meta's platforms remain the/a top choice for advertisers, delivering great returns on ad spending.
- The rising need for advertisers to display their ads against a finite number of users and a finite user-scrolling time results in ads becoming more expensive, further powering ARPU growth. For instance, the cost per thousand impressions (CPM) was around $3.23 in 2016, $5.96 in 2017, about $7.19 in 2020, and $14.71 as of November of 2021! Simply put, digital real estate is limited, and Meta is the biggest landlord in the social media space.
How long will Meta Platforms' dominance in the advertising space last?
The interesting question now is if Meta will maintain its present monopolistic position and whether other platforms are positioned to capture a part of its market share.
Such platforms could be Pinterest (PINS), Snap (SNAP), and ByteDance's (BDNCE) TikTok. While data for the latter is somewhat restricted, I can only comment on the others. In my view, while these platforms do have a place in the market due to their niche features (we are actually long Pinterest), they don't strictly compete with Meta.
Pinterest, for instance, is a fantastic platform, but its demographics are less advertiser-friendly. More than 77% of Pinterest's users are females, which makes it harder to use generic, nonexclusive ads, while around 51.2% of its total users reside outside the U.S. This translates to weaker consumer purchasing power, which again means less incentive for advertisers to choose it over Meta's diversified platforms.
It should then be no mystery why Meta's revenue growth remains quite impressive.
Upcoming earnings growth and Meta's valuation (The short-term upside)
As you can see illustrated below, Meta's actual earnings deviation against consensus estimates has not only been wide but has even further widened as of recently. This is quite weird as Meta is one of the most well-covered stocks globally, with plenty of info out there for experts to forecast estimates that will come close to its actual results.
If the deviation were anywhere from 5% to 10%, it wouldn't be surprising. But anything above 20% and even closer to 30%- 40%, as has been the case through various quarters over the past couple of years, is quite strange.
It seems as if Meta's continuous growth is not even of interest to the market. This is reflected in both the stock's valuation and expected EPS growth after all.
Firstly, note that Meta is trading at a forward P/E of around 25. Meanwhile, this is a company that's growing on average at around 30% per annum. This multiple is already cheap enough to potentially propel the stock higher, as we discussed at the beginning of this article. However, note that Meta's forward valuation is also based on analyst estimates for FY-2022 EPS of $14.41.
This is absolutely non-sense. This year-over-year growth assumes FY-2021 EPS of $13.96, which is likely to be higher in the first place following another beat on earnings in Facebook's upcoming FQ4 results. Then, a 3.2% year-over-year growth on earnings is nearly impossible, even if Meta's revenue growth was to decelerate significantly. You may argue that the company's increased spending on the Metaverse will suppress EPS growth for a while. However, this is not the case. In its Q3 results, Meta's CFO mentioned that:
We expect our investment in Facebook Reality Labs to reduce our overall operating profit in 2021 by approximately $10 billion.
...and later on the earnings call:
We are committed to bringing this long-term vision to life, and we expect to increase our investments for the next several years.
Indeed, this amount is set to grow going forward. However, the point is that these expenditures are already priced in FY-2021's results. Even if spending on Reality Labs were to grow annually equally to revenue growth (say 25%-35% in the coming years), which would imply stagnant net income growth during this period, EPS is still set to grow more powered by Meta's stock repurchases alone.
As you can see, Meta has been ramping up its stock repurchasing pace, which nearly doubled sequentially last quarter. Now any reasonable person would assume that this trend will endure going forward (which, by the way, signals earnings growth by itself). But, let's be extremely prudent and assume that the buybacks stay stable, which translates to an annualized rate of $60 billion based on last quarter's numbers.
At the company's current market cap, Meta would be repurchasing around 6.37% of its stock. This translates to double the EPS growth analysts are expecting for next year assuming the company reinvests every single dollar from its organic growth back into Reality Labs. Therefore, the stock is actually cheaper on a forward basis, relative to the forward P/Es we get based on analyst estimates. Hence, I can easily see the stock breaking out soon as its upcoming results continue to deliver better-than-expected earnings growth, leading to the stock becoming even more undervalued.
Note that I am leaving some of Meta's characteristics that could alone drive a valuation expansion out. These include the company featuring a $58 billion cash position and $0 in long-term debt.
The Metaverse opportunity (The long-term upside)
A lot of investors are confused about the Metaverse. When one thinks of the Metaverse, they are probably visualizing somebody with a VR helmet on their head for hours (or days in the future?) a la Ready Player One. While this could partially be an element of the Metaverse experience, in the long run, the Metaverse as a whole is quite more diverse and, surprisingly to many, already somewhat here.
Most people spend countless hours in front of their screens these days, and virtual items/appearances have become the new social currency. When gamers buy virtual items in video games to flex to their friends, it is no different than people wearing luxury brands in real life. It's a form of expression and communication.
Once you understand why doing things virtually (easy example: virtual meetings) is beneficial, then you just have to incorporate the real-life behavior into the Metaverse behavior. In other words, people will spend money for their virtual character (avatar) to be wearing a certain clothing brand (e.g., Ralph Lauren (RL)) in virtual meetings.
Remember, this is already happening. If gamers are spending $10 to buy a single skin for their virtual warrior in a single game, you can bet they will be spending way more on the avatar that actually corresponds to their real-life character. Add NFTs to the mix, and the Metaverse gets wild. Similar to how your car, house, and lawn garden's design say something about who you are (or who you see yourself as being in any case), I bet your NFT portfolio in the Metaverse will mean a lot more than these real-life representations.
If I see that your NFT collection consists of a certain NFT that allows you to sit in the front row of a Laker's game once in a while, another NFT that allows you to have dinner with your favorite artist once a year, and another which allows your virtual avatar to get the latest virtual Nike items earlier than other users, I can tell more about you compared to the real-life adoption of this concept.
I won't get technical on this aspect as the article will get completely derailed, but once you get why the Metaverse is going to be bigger than the current state of social media, its whole case/prospects become too obvious. It's what we already do, but on steroids. And, to assume that Meta, the company with the largest user base globally and (one of) the company(ies) with the most data on all of us, is going to be one of the dominant forces in the space, is only natural.
To speculate what the financial impact of the Metaverse will have on Meta over the next decade would be irrational, although one can imagine a myriad of potential sources of revenue (more advertising, brand deals, royalties from smart contracts through NFTs). The truth is nobody can know what the actual numbers will look like. However, Meta already has the greatest infrastructure amongst probably everyone to benefit from this phenomenon.
My point throughout this article, however, is that regardless of the Metaverse's future benefits, the company is already attractive enough on its own to hold significant upside potential going forward based on the present trajectory of its financials.
For this reason, we see Meta Platforms as stock that holds both substantial short-term upside due to its humble forward estimates and valuation, as well as significant long-term upside from the metaverse story, which seems like an inevitable transition towards social media 2.0.
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