Big Tech YTD stock price
Meta Platforms, Inc. (NASDAQ: META). Although others such as Amazon (AMZN), alphabet (GOOG)(GOOGLE), and Microsoft (MSFT), may have suffered relatively tame discounts so far, the frenzy is not over, with Apple (AAPL) similarly losing -23.70% of its value at the same time. The time of maximum pain is not here yet.
However, we believe that Meta’s long-term trajectory remains solid given the promising signs we are seeing so far. We will discuss in more detail below.
1. Monetization is improving by leaps and bounds
Meta continues to report improved monetization on its Instagram feeds, with more than $1 billion in annual revenue to date. Its Facebook platform is also doing great with a total of $3 billion in execution speed. The company has also increased its reel consumption with an impressive 50% increase compared to six months ago, with 140 billion reels played daily on Facebook and Instagram.
Additionally, Meta works with Salesforce (CRM) to include WhatsApp/Messenger/Instagram Direct as paid messaging/click to messaging ads for online businesses. WhatsApp alone boasts an impressive 80% year-over-year growth to $1.5 billion, while adding to the combined $9 billion in annual revenue across the three messaging platforms. Furthermore, we expect its JioMart on WhatsApp model to be quickly replicated globally as well, with huge potential to create a comprehensive business communication/e-commerce/payments ecosystem within the WhatsApp/App family over the next few years. Why not?
Additionally, the app family’s engagement remains strong, with 3.7 billion monthly users. WhatsApp alone boasts 2 billion active daily users, while Facebook is close to 2 billion daily users and Instagram reports over 2 billion monthly users. We do not need a crystal ball to assume that the monetization of Meta will indeed be very successful, combined with the effect of the exit from Twitter (TWTR) and the possible ban of TikTok in the US.
2. Investments are well balanced and promising
Research and development expenses to revenue
Over LTM, Meta spent 27.4% of its revenue on R&D, indicating a growing focus on hiring for the Family of Apps, Reality Labs, and Marketing/Sales/G&A, rather than the misconception of simply being Metaverse. The company is obviously aggressively developing its AI capabilities, advertising, click-to-message ads and reels against TikTok. Aggression in R&D efforts is obviously paramount, as AAPL’s privacy changes create catastrophic $10 billion headwinds. Additionally, 82% of FQ3’22 spending is focused on the development and operation of the Apps family. Based on the chart above, it’s clear that Meta isn’t overspending on its R&D efforts compared to other social media companies like TWTR and Snap ( SNAP ).
While Meta has also pushed for a gradual increase in Reality of Labs spending through 2023, it will be money well spent as it gives Meta leadership in an intensely competitive market. You can refer to our previous analysis here: Apple Vs. Meta: Mixed Reality Combat. Even Nvidia ( NVDA ) is investing heavily in Omniverse, easily funneling 21.22% of its revenue to research and development efforts so far. We continue to believe in Zuckerberg’s passion and vision for Metaverse, especially after witnessing the very promising photorealistic avatars and face tracking that the company recently presented at Connect 2022. We’re starting to see the fruits of its investment, whose market enthusiasm peaked last year at Meta Metaverse discovery and thus died tragically during the height of these recessionary fears.
The application of Metaverse is much broader than simply online gaming and world building, such as Roblox (RBLX) or Horizon World. As more large tech companies embrace remote work post-pandemic, we expect these opportunities to grow as B2B applications for virtual AI training, hologram video calls, large-scale industrial/design/engineering/architecture simulations, revolutionizing scientific discovery, and improving 3D workflows. globally. Meta will get there sooner than expected thanks to expanding partnerships with MSFT, Adobe ( ADBE ), Autodesk ( ADSK ), Zoom ( ZM ), Accenture ( ACN ), and others. Don’t be as short-sighted as Mr. Market.
Capital expenditures in cash from operations
Additionally, Meta’s capital investments in data centers and Reality Labs have so far remained relatively modest compared to other cloud/e-commerce partners such as AMZN, though admittedly elevated compared to GOOG and MSFT.
In the meantime, we’re not at all worried about this level of investment as the company continues to report solid FCF generation of $26.4 billion LTM, compared to AMZN’s $26.32 billion, GOOG’s $62.54 billion, and MSFT’s $63.33 billion. time. Even with such impressive numbers, the latter two couldn’t escape the ongoing carnage with shares down -42.45% and -36% respectively YTD. Tragic, because we expect Met’s massive expansion during the recession to pay off extremely well once the macro economy recovers and market sentiment improves.
3. Its FCF profitability will improve
Meta is expected to report to adj. revenue and cor. net income growth at a CAGR of 13.9% and 3.6% from FY19 to FY2025, respectively. And as indicated by the share price destruction, the company’s future performance rating is also now significantly downgraded by -22.35%. I think some discounts are warranted as its EBIT/net income margins are expected to continue to deteriorate from 41%/34.8% in 2019, 39.6%/33.4% in FY21 and through 24, 1%/19.7% in 2025.
This of course explains the decline in Meta’s 2025 EPS of $12.12 with a CAGR of -10.1% over the next four years, compared to 2019 EPS of $8.56, a pre-pandemic CAGR of 26.5% and 2021. Annual EPS of $13.77 pandemic CAGR of 6.8%. .
Meta, on the other hand, is expected to see significant FCF production growth of 87.08% year over year in 2024 as expenses normalize and ad dollars return to full volume. Investors should also note the sustained improvement in FCF profitability, starting at 30% in FY2019, 33.2% in FY2021, and finally up to 39.7% in FY2025. Hence, from FY 2024 onwards, the company needs to reduce its need for debt dependency.
And in case anyone forgot, AAPL recently reported a whopping $98.95 billion in long-term debt and $2.93 billion in annual interest expense during its last FQ4’22 earnings call. Since FQ3’19, these numbers have increased by 7.78% and 6.15%, while its net debt continues to increase by 62.57% to -$36.62, and cash/short investments at the same time continues to decrease by -51 .96%. As such, this is indicative of AAPL’s increased reliance on debt and declining liquidity over the past three years.
So why should anyone fear Met’s paltry $10 billion in debt reported in FQ3’22? Especially given its impressive FCF-adjusted CAGR of 19.3% from FY2019-2025. In the meantime, we encourage you to read our previous article on Meta to better understand its position and market opportunities.
- Meta Platforms: Absolute Carnage – No visible floor
So, there is a Meta Stock purchaseSell or hold?
Meta 10Y EV/Earnings and P/E valuations
The meta is currently trading at an EV/NTM earnings of 1.90x and an NTM P/E of 12.35x, hitting all-time 10-year lows. The stock also traded at $88.91, which is -74.87% away from the 52-week high of $353.83, coming close to the 52-week low of $88.41. Despite this, consensus estimates for Meta’s prospects remain bearish given their price target of $153.85 and a 73.04% upside from current prices.
Meta 10Y stock price
It is clear that there is no clear floor and support here. After the FQ3’22 earnings call, Meta shares continued to fall sharply by -31.51%, which was significantly worsened by the pessimistic market sentiment.
The latter is due to the failed reversal of the Fed’s rumored turnaround after the Bank of Canada’s earlier-than-expected 50 basis point hike. Early signs already point to similarly elevated inflation in October, leading to painful October and November CPI/CPI results. With 48% of analysts expecting another 75 basis point hike at the Fed’s December meeting, we can be sure that more pain is to come. Terminal rates have already been tentatively raised to 5.14% in June 2023, signaling another 50 basis point hike ahead of the Fed’s February 2023 meeting.
Combined with Meta management’s bleak guidance through 2023, it’s easy to assume that the Meta may fall further to $70 in the next two months. Bottom-fishing investors would be well advised to wait a little longer and load at that time. However, we choose to gnaw these levels as most of the pessimism has already sunk in. Of course, one must be prepared to continue to tolerate moderate volatility for portfolio growth over the next decade.