The market has lost its mind — All Blue Capital is long Meta
Investment thesis
Shares of Meta plunged ~30% after reporting its Q4 earnings on Feb 2, 2022 post-market. With ~$237 billion in market capitalization wiped out in a single day, this represents the largest loss of value ever recorded in capital markets. The markets punished the company for what was seen as sluggish growth in users, revenue, and cautionary guidance for FY 2022. We believe this overreaction made the stock attractive and consider Meta to be a strong buy at these levels. It is currently trading at PE ~15x, way below the industry average. Meta remains a market leading money-making machine and is highly profitable, with operating and net income margins for FY 2021 of ~40% and ~33%, respectively. The company has also demonstrated a solid track record in both innovation and strategic acquisitions over the years, which, coupled with its nearly $16 billion readily available in cash, is likely to increase its revenue potential in the near future. Other avenues for growth include an evolution of Whatsapp into an e-payment ecosystem and the metaverse, in which Meta has invested massively — to the point of rebranding itself and creating the dedicated Reality Labs division. The company also spent $20 billion on buybacks in Q4 2021 alone and is expected to continue that trend moving into FY 2022. Finally, Peter Thiel’s departure from Meta’s board will likely turn out to be a positive thing, allowing the company to embrace a new vision and have a fresh set of ideas moving forward. With the stock price currently trading at 40% down from ATHs in Aug 2021 and 30% down from its pre-earnings levels, we believe FB is a great buying opportunity and now a value play.
Background
2021 was a tumultuous year for Meta. The company had to respond to changes in its operating systems and privacy policies which affected the company’s core advertising business; untangle increased regulatory scrutiny; and deal with PR blowbacks following the release of the “Facebook files” in the WSJ unveiling the potential negative impact of its social platforms on younger users.
With that being said, Meta still remains the single largest collection of social networks and communication platforms in the world. The company’s “family of apps” include Facebook, Instagram, and WhatsApp. These apps are withstanding the test of time, being the preferred mode of communication for nearly half the world’s population. Meta is also at the forefront of the metaverse and virtual reality spaces. The company sees the next few decades dominated by the metaverse and is perfectly positioned to see a return on its investment if this turns out to be the case. In fact, despite the metaverse being a buzz, very few other companies outside of Meta have made such substantial R&D headway in the space.
Earnings and selloff
Meta’s Q4 earnings came at a critical moment in the markets but the ensuing selloff was, we believe, overly exaggerated. The recent volatility in the markets saw most tech companies experiencing rapid and massive corrections, sometimes 50% and more. In this context, the quarterly numbers of the leading tech giants — MSFT, GOOG, AMZN, and FB — were widely anticipated and scrutinized to determine a potential bottom and bounce back across tech names. Out of the big four, all passed the test and saw their prices bounce back up, creating a momentum for an overall rebound in the market since early February. All except Meta. Meta stock crashed by a staggering 26% in after-hours after reporting its Q4 2021 earnings. So, what went so wrong?
FB beat consensus estimates by $230 million on revenue, reporting $33.67 billion, a 20% YoY increase. Meta had a slight miss of $0.16 on its bottom line, with a reported EPS of $11.38 versus the $11.57 expected by analysts. DAUs increased 5% YoY, registering at 1.93 billion, which also came short of the 1.95 billion DAUs expected. MAUs came in at 2.91 billion, also slightly lower than the anticipated 2.95 billion. Notwithstanding these slight misses in key metrics, we do not believe there is anything in this quarterly report that warrants a $237 billion decline in market capitalization.
The metaverse — an opportunity for exponential growth
The metaverse presents a massive growth potential for the company and we believe that Meta is likely to be the leading name in this nascent industry. Meta is already investing billions in developing its Reality Labs business segment — the branch of the company dedicated to the metaverse, and despite currently operating at a loss, it is likely to turn it into a very profitable enterprise moving forward.
One of the things that worried investors on the Q4 earnings call was Meta’s $10 billion loss in 2021 on Reality Labs. However, being only the early days of the metaverse, Meta is pragmatically setting the building blocks of what is likely to become a hugely profitable business. We can easily make a parallel with investors that didn’t think it was wise for a company to invest in the internet in the 1990s but turned out to be a massive pay off for the firms that invested wisely.
Most importantly, Meta is a money-generating machine. The billions currently spent on building the future of the metaverse with Reality Labs will barely make a dent in the company’s overall earnings generation ability. As the unit will gradually become profitable, Reality Labs is likely to provide substantial additional growth for the company.
Turning WhatsApp into an e-payment ecosystem
Meta is actively attempting to turn WhatsApp into a fully self-supported payment ecosystem which will support blockchain-based payments. The company recently gave up Diem, formerly known as Libra — a blockchain-based stablecoin payment system project Meta began in 2019 — on fears that the company may expand into the financial global ecosystem. However, despite the pushback, Meta is persevering to enter the blockchain payments space. In a SEC filing, it disclosed an initiative to keep a digital wallet, Novi, which may use “blockchain-based assets” like USDP stablecoin. This is a clear indication that the company is moving toward e-payments and sees a potential for creating a financial ecosystem within WhatsApp.
In doing so, Meta will not only act as a payment processor for money movements but also capture spend in shopping within its Facebook native app. The company is essentially closing the loop for the whole payment ecosystem in terms of money shifts and payments. Additionally, this will also increase the amount of the data it can sell to third parties. We believe this to become the biggest monetization opportunity of Meta going forward.
Growth through acquisitions
Meta has a proven expertise of generating growth through acquisitions. Arguably, the timely and successive acquisitions the company has made over the years contributed at least partially to its unparalleled growth story. Those include early key acquisitions such as Divvyshot in 2010, which allowed Meta to implement its event tagging technology; Sharegrove the same year, which brought Facebook groups in 5 months following the acquisition; or Beluga in 2011, which gave birth to the Facebook Messenger mobile app.
These were followed by more high profile acquisitions such as Instagram in 2012, Microsoft’s ad server Atlas in 2013, and WhatsApp in 2014, which was bought for $19 billion and shifted the company’s focus to international markets with an additional 450 million users in Asia and Europe. Finally, Meta also made a bold and early move into the virtual reality space by acquiring Oculus in 2014, reminding that the company has already been preparing for the Web 3.0 for over 8 years.
With nearly $16 billion in cash and approximately $40 billion in FCF, Meta could easily engage on a new buying spree, making, for instance, strategic acquisitions and synergies to propel its rapidly growing metaverse business. Whatever the company decides to do, its successful track record in terms of acquisitions suggests any new additions to the group are likely to increase its revenue potential.
Share buybacks
Share buybacks are another way for Meta to grow, add value for the shareholders and demonstrate that it believes in its own success. In the past four years, Meta decreased the number of outstanding shares at a CAGR of 1.76. The total amount of outstanding shares was reduced from 2.96 million in 2017 to 2.81 million in 2021, accelerating the pace recently with $20 billion spent in shares buybacks in Q4 2021. When considering that Meta has a FCF of $39.2 billion, it could easily continue repurchasing up to 6% of all outstanding shares and therefore contribute to a corresponding 6% growth in its bottom line.
In the same way as Apple was able to mask its decelerating earnings growth between 2015 and 2020 using share buybacks, we believe that Meta will be able to more than compensate for a deceleration in revenue growth by repurchasing its shares until the metaverse investment starts paying off.
Bullish on Meta — strong prospects for growth and highly undervalued
Meta remains a hugely profitable business, generating $38.44 billion in FCF in FY 2021, a 67% YoY increase which is impressive considering the size of the company. The EPS for the same period stood at $13.77, a 36% YoY increase.
Even when taking into account the risks associated with a slightly decelerating growth — mostly related to a content consumption format switch from news feed to video as well as ad-targeting modifications — the company is still a profit-generating powerhouse who demonstrated nine consecutive years of quarterly revenue growth above the 10% mark, an incredible achievement for such a large capitalization and equaled only by a few. The current dive in Meta’s stock price makes it an attractive valuation and provides a cheap entry point. The company has strong drivers for sustained growth. All Blue Capital is long Meta.
