Description

Meta Platforms (META) $170

Meta Platforms offers an unquestionably high quality business at a compelling valuation. The company is expected to deliver $38b in EBIT on $125b in sales in 2022 and is currently valued at $442b for the enterprise or under 12x TEV/EBIT for a company that has massive scale, is growing at 2x GDP, has 80%+ gross margins, and relatively low capital intensity. META trades at 14.6x 2022E GAAP eps before subtracting excess balance sheet cash, while the S&P 500 trades at 17x 2022E earnings.

There are five primary reasons that META has sold off -55% from its peak last fall. I believe that all five reasons should pass without permanently impairing the value of the business.

Metaverse/Reality Labs - META has been investing significant sums of capital into developing the metaverse. $10b in 2021, and an estimated $15b in 2022, and $16b in 2023. This has spooked the market for two reasons. First is the obvious concern about such an expensive investment program with an uncertain payoff. Second, is the concern that the need for this investment is because META is dependent on platforms it doesn't control between themselves and their users - such as Apple. The metaverse offers an opportunity for META to create their own platform for users to access directly. While these are valid concerns, there is reason to believe that META has significant control over how it allocates capital, has a strong track record of excellent capital allocation (whatsapp & instagram), has a founder that has a significant ownership interest plus pride at stake, and ultimately the business will exist with multiple paths to users including Oculus, iOS, Android, MacOS, and Windows.

While its too early to predict how the metaverse will evolve, if META is able to make the metaverse into just a compelling gaming platform, given the size of their user base, it's not too much of a stretch to imagine it being worth $50-100b+ in the future.

Competition - Every generation finds its own ways to connect. Facebook Blue matures and the user profile skews older. Instagram is how the under 40 crowd communicates, and the next generations are on TikTok. It's always been a competitive landscape and META has incorporated lots of the means of engagement of Snapchat and TikTok into instagram.  Facebook has a solid track record of adapting to a highly competitive environment. While it probably does not have the ability to acquire competition as it has done in the past, it can still replicate and incorporate features of its competition in its own offerings and its scale and balance sheet strength give it significant competitive advantages

Apple - Changes in Apple's iOS platform to protect user privacy have impeded META's ability to track user behavior across sites using the Facebook Pixel. This had the immediate effect of lowering conversion rates and increasing costs to advertisers. However, the impact of this has softened over time. Facebook simply has enough scale and presence to collect user data, some users will opt-in to sharing, and advertisers will change the structure of their ad campaigns to adjust. Facebook remains the single most effective platform for advertisers.

Regulation - There are always headlines about regulatory risk. META is in a strong position to weather these storms for several reasons. First, the issues at hand are relatively complex and would likely involve new laws being passed or a new interpretation of current law in a court setting. Neither is easy. Second, META has the ability to represent itself effectively. Finally, some businesses are inherently resilient. Having watched Mastercard and Visa over decades, each faced legal challenges to how they ran those businesses that at the time, many thought would fundamentally erode the quality of those businesses. That was incorrect as each time, the companies found ways around whatever roadblocks were put in their way. I think META has the scale and the user base and offers services that people fundamentally want and have becomed conditioned to need. It is very hard to regulate away such a business.

Market - The shift in the stock market that began last fall first took down the high flyers, the pandemic cinderella stories. Recently, it has shifted towards the generals, driven in part by fund flows out of SPX. It may continue for some time, who knows, but it doesn't impact or reflect the value of the business and, this too shall pass.

Ultimately, I see that the reasons to be cautious on META have been more than priced into the stock at $170. While it is not growing at a rate that it was a decade ago, it is a formidable business with a fortress balance sheet. Few companies are even in a position to spend $50b-60b over four years on a new product. Fewer still can finance it out of cash flow.Right now, the market is offering up a fantastic business at an absolute bargain price as well as one being substantially below market on a relative basis. This discount cannot be expected to last forever. If Reality Labs works, investors will benefit. If it doesn't, the spending will be curtailed, and investors will benefit. If the market remains volatile, quality businesses like META should shine. If the market rebounds sharply, META should do well on the back of all the index fund inflows alone. If the market simply stabilizes and time passes, META should be able to deliver low double digit earnings growth for years to come.

Catalyst

Evidence of results from Reality Labs. Results show waning impact of Apple iOS changes. Investor sentiment changes. In the meantime, you own one of the world's great businesses at a very attractive price.