IS META PLATFORMS (FB) A BUY AFTER THE DIP?

Hey Everyone, the following DD is a fraction of the research I did on Meta Platforms (FB). Some of the post will refer to charts and graphics which can be found via the link below. The full DD along with charts can be found on my investment blog: https://tedinvests.com/is-meta-platforms-fb-a-buy-after-the-dip/  On Thursday (2/3), Meta Platforms set a record for the largest daily loss for a U.S firm. The company’s value fell by a whopping $230 billion (26.4%). Naturally the question that arose for investors was what did the company report that made the stock fall so drastically? Meta is by no means a penny stock which often move double digit percentages when they report earnings due to the size of their market cap. For that reason it’s strange why the company lost so much value. Me being a shareholder of Meta and seeing it drop so drastically is what prompted me to write this post. In this post I want to cover if the market is presenting investors with a buying opportunity, what concerns investors have regarding the company, and the company’s financials/earnings. Financials/Earnings As we can see Meta beat on revenue by 1.51% according to Zacks consensus estimates and missed on EPS by $0.17 billion. Thus, earnings weren’t too bad based on what they delivered overall. Taking a deeper look, the concerns outweigh the good. Operating margins fell by 9% YoY and taxes increased by 5%. Furthermore, expenses increased by a whopping 38% primarily driven by Reality Labs hardware costs, infrastructure payments, new hires, R&D (increase of 35%), marketing and sales (increase of 34%), and general and administrative costs associated with the ramp in new employees (3,700 new employees in Q4). Net income was down by 8.3% YoY and that can be attributable to the increase in expenses I mentioned. Looking at their user base we see further concerns, while family daily active people increased 4.55% YoY, that number decreased by .05% QoQ which shows that their growth in terms of users is starting to slow. While their growth in users slowed down, they did manage to increase average revenue per person by 8.9% YoY and 14.79% QoQ. Another positive that I noticed that may have been overlooked by investors is the increase of 36.22% in free cash flow YoY and 31.58% QoQ. The financials didn’t necessarily warrant the drop investors saw in the stock price, but concerns regarding their future outlook is what threw retail investors and Wall Street off. Investor Concerns There seems to be 3 primary concerns that investors have regarding the future of Meta platforms: Can Instagram Reels compete with the likes of TikTok and what impact will that have on ad revenue? How will Meta navigate their way around the iOS privacy changes that Apple implemented last year? How long will it take before Reality Labs will achieve profitability and how profitable can that segment become? TikTok has taken the internet by storm these past couple years. According to Backlinko.com, TikTok has 1 billion monthly active users, was the most downloaded non-game app in 2021, and had a 1157.76% increase in its global userbase between Jan 2018 and July 2020. In addition, TikTok is the most engaging social media app with an average session length of 10.85 minutes. Thus, it’s without a doubt that investors are concerned that the rise of TikTok will steal market share from Meta and lead to decreased ad revenue for the company. Meta’s response to TikTok came in the form of Instagram Reels. Reels is a feature of Instagram that allows users to create and share short-form video content similar to TikTok. In an interview with Yahoo Finance, Evercore ISI Senior Managing Director and Head of Research Mark Mahaney stated that Facebook has a “very different value proposition then what TikTok offers.” I agree with the statement that Mark Mahaney said, but regardless we will have to wait and see in the back half of the year if ad revenue for Meta will continue to grow as supply chain issues get resolved and companies look to increase marketing efforts on Meta’s family of apps. Apple’s iOS 14.5 update released in April of last year did more damage to Meta than any of Apple’s updates in the past. With that update Apple implemented a feature that asked people if they wanted to opt-out of apps tracking them across the web. In turn that update caused tension for advertisers who rely on Meta’s apps for marketing. In Meta’s Q4 2021 conference call, Meta CFO Dave Wehner stated, “we will lap a period in which Apple’s iOS changes were not in effect and we anticipate modestly increasing ad targeting and measurement headwinds from platform and regulatory changes.” He also stated “we will lap a period of strong demand in the prior year, and we’re hearing from advertisers that macroeconomic challenges like cost inflation and supply chain disruptions are impacting advertiser budgets.” So to think that Meta will miraculously see a meaningful increase in ad revenue in at least the first half of this year is an overly optimistic assumption. Therefore, we will have to wait and see the true effects of Apple’s iOS update on Meta’s ad revenue in the later half of this year. As to when or if they will be able to get around the update remains a question in the minds of investors. Perhaps the biggest question that looms over this company is how profitable their Reality Labs division will become as they increase spending and focus on the metaverse. The Reality Labs division is tasked with building the company’s vision for the metaverse and also includes revenue from hardware such as the company’s Meta Quest virtual reality headset. This past earnings was the first time that Meta revealed the financials of its Reality Labs division. In 2021 the Reality Labs division achieved revenue of $2.27 billion, but the division’s expenses totaled $10.2 billion. As we can see from the charts below, revenue from this division has been inconsistent while expenses have continued to ramp since Q1 2021. In their Q4 2021 conference call, the CFO stated, “Reality labs expenses were $4.2 billion… driven by employee-related costs, R&D operating expenses, and cost of goods sold. Reality labs operating loss was $3.3 billion in the fourth quarter.” In terms of progress within the Reality Labs division, CEO Mark Zuckerberg said in their conference call, “We’re working toward a release of a high-end virtual reality headset later this year, and we continue to make progress developing Project Nazare, which is our first fully augmented reality glasses. And as for software, Horizon is core to our metaverse division. I mean, this is our social VR world-building experience that we recently opened to people in the U.S. and Canada.” Since the metaverse is such a new concept, investors are really worried as to what the future of the Reality Labs division will look like. I remain hopeful that their vision for the metaverse will play out over the coming years, but like many other investors I worry as to how profitable this division will become especially as it relates to software. Mark Zuckerburg stated in their conference call that “People have spent more than $1 billion on Quest store content, helping virtual reality developers grow and sustain their businesses.” Is Meta Platforms a Buy? Overall I think there is a lot of uncertainty surrounding the company. I would consider this to be a good buying opportunity if you’re looking to invest for the long term as I advocate and believe in the direction of the company. For investors looking to invest with a time horizon in mind of 3-6 months I would shy away. Meta Platform’s family of apps have historically shown to generate consistent free cash flow and revenue growth. Although, as I’ve stated investors worry how they stack up against competition, what Apple’s iOS 14.5 update will do to the company’s ad revenue, and how long it will take for Reality Labs to become profitable and how their vision for the metaverse will shape up. As always, best of luck! Sources: https://s21.q4cdn.com/399680738/files/doc_financials/2021/q4/FB-12.31.2021-Exhibit-99.1-Final.pdf https://www.youtube.com/watch?v=mCIrut3hsso https://backlinko.com/tiktok-users https://www.statista.com/statistics/272014/global-social-networks-ranked-by-number-of-users/ https://s21.q4cdn.com/399680738/files/doc_financials/2021/q4/FB-12.31.2021-Exhibit-99.1-Final.pdf https://www.fool.com/earnings/call-transcripts/2022/02/03/facebook-fb-q4-2021-earnings-call-transcript/ https://about.instagram.com/blog/announcements/introducing-instagram-reels-announcement https://www.wired.co.uk/article/ios-14-5-update-app-tracking

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IS META PLATFORMS (FB) A BUY AFTER THE DIP?

bullish
Hey Everyone, the following DD is a fraction of the research I did on Meta Platforms (FB). Some of the post will refer to charts and graphics which can be found via the link below.
The full DD along with charts can be found on my investment blog: https://tedinvests.com/is-meta-platforms-fb-a-buy-after-the-dip/

On Thursday (2/3), Meta Platforms set a record for the largest daily loss for a U.S firm. The company's value fell by a whopping $230 billion (26.4%). Naturally the question that arose for investors was what did the company report that made the stock fall so drastically? Meta is by no means a penny stock which often move double digit percentages when they report earnings due to the size of their market cap. For that reason it's strange why the company lost so much value. Me being a shareholder of Meta and seeing it drop so drastically is what prompted me to write this post. In this post I want to cover if the market is presenting investors with a buying opportunity, what concerns investors have regarding the company, and the company's financials/earnings.

Financials/Earnings

As we can see Meta beat on revenue by 1.51% according to Zacks consensus estimates and missed on EPS by $0.17 billion. Thus, earnings weren't too bad based on what they delivered overall. Taking a deeper look, the concerns outweigh the good. Operating margins fell by 9% YoY and taxes increased by 5%. Furthermore, expenses increased by a whopping 38% primarily driven by Reality Labs hardware costs, infrastructure payments, new hires, R&D (increase of 35%), marketing and sales (increase of 34%), and general and administrative costs associated with the ramp in new employees (3,700 new employees in Q4). Net income was down by 8.3% YoY and that can be attributable to the increase in expenses I mentioned. Looking at their user base we see further concerns, while family daily active people increased 4.55% YoY, that number decreased by .05% QoQ which shows that their growth in terms of users is starting to slow. While their growth in users slowed down, they did manage to increase average revenue per person by 8.9% YoY and 14.79% QoQ. Another positive that I noticed that may have been overlooked by investors is the increase of 36.22% in free cash flow YoY and 31.58% QoQ. The financials didn't necessarily warrant the drop investors saw in the stock price, but concerns regarding their future outlook is what threw retail investors and Wall Street off.

Investor Concerns

There seems to be 3 primary concerns that investors have regarding the future of Meta platforms:

  1. Can Instagram Reels compete with the likes of TikTok and what impact will that have on ad revenue?
  2. How will Meta navigate their way around the iOS privacy changes that Apple implemented last year?
  3. How long will it take before Reality Labs will achieve profitability and how profitable can that segment become?

TikTok has taken the internet by storm these past couple years. According to Backlinko.com, TikTok has 1 billion monthly active users, was the most downloaded non-game app in 2021, and had a 1157.76% increase in its global userbase between Jan 2018 and July 2020. In addition, TikTok is the most engaging social media app with an average session length of 10.85 minutes. Thus, it's without a doubt that investors are concerned that the rise of TikTok will steal market share from Meta and lead to decreased ad revenue for the company. Meta's response to TikTok came in the form of Instagram Reels. Reels is a feature of Instagram that allows users to create and share short-form video content similar to TikTok. In an interview with Yahoo Finance, Evercore ISI Senior Managing Director and Head of Research Mark Mahaney stated that Facebook has a “very different value proposition then what TikTok offers.” I agree with the statement that Mark Mahaney said, but regardless we will have to wait and see in the back half of the year if ad revenue for Meta will continue to grow as supply chain issues get resolved and companies look to increase marketing efforts on Meta's family of apps.

Apple's iOS 14.5 update released in April of last year did more damage to Meta than any of Apple's updates in the past. With that update Apple implemented a feature that asked people if they wanted to opt-out of apps tracking them across the web. In turn that update caused tension for advertisers who rely on Meta's apps for marketing. In Meta's Q4 2021 conference call, Meta CFO Dave Wehner stated, “we will lap a period in which Apple's iOS changes were not in effect and we anticipate modestly increasing ad targeting and measurement headwinds from platform and regulatory changes.” He also stated “we will lap a period of strong demand in the prior year, and we're hearing from advertisers that macroeconomic challenges like cost inflation and supply chain disruptions are impacting advertiser budgets.” So to think that Meta will miraculously see a meaningful increase in ad revenue in at least the first half of this year is an overly optimistic assumption. Therefore, we will have to wait and see the true effects of Apple's iOS update on Meta's ad revenue in the later half of this year. As to when or if they will be able to get around the update remains a question in the minds of investors.

Perhaps the biggest question that looms over this company is how profitable their Reality Labs division will become as they increase spending and focus on the metaverse. The Reality Labs division is tasked with building the company's vision for the metaverse and also includes revenue from hardware such as the company's Meta Quest virtual reality headset. This past earnings was the first time that Meta revealed the financials of its Reality Labs division. In 2021 the Reality Labs division achieved revenue of $2.27 billion, but the division's expenses totaled $10.2 billion. As we can see from the charts below, revenue from this division has been inconsistent while expenses have continued to ramp since Q1 2021. In their Q4 2021 conference call, the CFO stated, “Reality labs expenses were $4.2 billion… driven by employee-related costs, R&D operating expenses, and cost of goods sold. Reality labs operating loss was $3.3 billion in the fourth quarter.” In terms of progress within the Reality Labs division, CEO Mark Zuckerberg said in their conference call, “We're working toward a release of a high-end virtual reality headset later this year, and we continue to make progress developing Project Nazare, which is our first fully augmented reality glasses. And as for software, Horizon is core to our metaverse division. I mean, this is our social VR world-building experience that we recently opened to people in the U.S. and Canada.” Since the metaverse is such a new concept, investors are really worried as to what the future of the Reality Labs division will look like. I remain hopeful that their vision for the metaverse will play out over the coming years, but like many other investors I worry as to how profitable this division will become especially as it relates to software. Mark Zuckerburg stated in their conference call that “People have spent more than $1 billion on Quest store content, helping virtual reality developers grow and sustain their businesses.”

Is Meta Platforms a Buy?

Overall I think there is a lot of uncertainty surrounding the company. I would consider this to be a good buying opportunity if you're looking to invest for the long term as I advocate and believe in the direction of the company. For investors looking to invest with a time horizon in mind of 3-6 months I would shy away. Meta Platform's family of apps have historically shown to generate consistent free cash flow and revenue growth. Although, as I've stated investors worry how they stack up against competition, what Apple's iOS 14.5 update will do to the company's ad revenue, and how long it will take for Reality Labs to become profitable and how their vision for the metaverse will shape up.

As always, best of luck!

Sources:

  1. https://s21.q4cdn.com/399680738/files/doc_financials/2021/q4/FB-12.31.2021-Exhibit-99.1-Final.pdf
  2. https://www.youtube.com/watch?v=mCIrut3hsso
  3. https://backlinko.com/tiktok-users
  4. https://www.statista.com/statistics/272014/global-social-networks-ranked-by-number-of-users/
  5. https://s21.q4cdn.com/399680738/files/doc_financials/2021/q4/FB-12.31.2021-Exhibit-99.1-Final.pdf
  6. https://www.fool.com/earnings/call-transcripts/2022/02/03/facebook-fb-q4-2021-earnings-call-transcript/
  7. https://about.instagram.com/blog/announcements/introducing-instagram-reels-announcement
  8. https://www.wired.co.uk/article/ios-14-5-update-app-tracking
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