Meta Platforms Inc. (FB, Financial), formerly known as Facebook, owns social media platforms such as Facebook, Instagram and Whatsapp, as well as the leading virtual reality platform Oculus Rift. However, it saw user growth slow in its latest quarter, and its push into the Metaverse doesn't seem to be taking off quite yet. This has resulted in a stock price decline.
Here are the top six factors that I am considering in my quest to decide whether Meta is a buy - or a sell.
Reason 1 (sell) - slowing growth
Meta recently announced their fourth quarter and full-year earnings for 2021. User growth has slowed down in 2021, where Facebook daily active users (DAUs) were 1.92 billion on average, an increase of just 5% year-over-year. This was much less than then the 2020 lockdown highs of 10.9% user growth.
But more worryingly, this was also slower than the pre-pandemic growth rate of 8.56%. I have created a table below showing the user growth I have been tracking quarter over quarter.
Reason 2 (sell) - lower ad revenue
Meta still makes the majority of its revenue from advertising (over 97%) and is in an advertising duopoly along with Alphabet (GOOG, Financial)(GOOGL, Financial).
For ad impressions, the company experienced headwinds, with a shift in engagement more towards reels which monetize at lower rates than Feed and Stories.
In addition, it is facing “increased competition” for people's time. This “increased competition” is most likely to be the elephant in the room that is TikTok. TikTok now has over 1 billion monthly active users (MAUs)! This is fast approaching Instagram’s 1.4 billion MAU’s. Below is a chart comparing the MAUs for several popular platforms:
- Facebook - 2.9 billion
- YouTube - 2.2 billion
- Instagram – 1.4 billion
- TikTok – 1.0 billion
Does competition from platforms such as TikTok represent a systematic shift in people's tastes, or Is this a just a temporary setback?
Reason 3 (buy) - great founder
Founder Mark Zuckerberg and a strong management that includes Sheryl Sandberg is a major positive for Meta. Zuckerberg is the founder of the company and is a strategic genius. He executes a very similar strategy to Microsoft (MSFT, Financial) in the late 90's, called the "fast follow." When a new competitor product starts to gain traction, Meta tries to acquire or copy it as fast as possible:
- Instagram (Acquisition)
- Snapchat (Instagram Stories)
- TikTok (Instagram Reels)
- Youtube (IGTV/Facebook Watch)
For me, the future of Meta is a bet on the execution skills of Zuckerberg and his ability to continually pivot the company as he has done previously.
If Zuckerberg left (which i don't think he will), I would seriously consider selling my holding in the stock (disclaimer: this is not financial advice, just personal opinion). Investing with great founders who have skin in the game is a strategy many successful hedge fund managers use, including the legendary Nick Sleep of Nomad Investment partners, which averaged a 20.8% return for over 12 years. Zuckerberg has a large insider holding and owns approximately 12% of the company.
Reason 4 (buy) - the Metaverse
As the new name showcases, Meta has changed the company's direction to focus more on the Metaverse, a virtual reality world combining multiple technologies such as Augmented Reality (AR) & Virtual Reality (VR) for work and socializing.
Zuckerberg states this is still in line with Facebook's mission to "bring people together." This could pay off if the consumer demand for the technology is there, and if it can achieve Facebook-like dominance with its Metaverse platform. Zuckerberg is putting his money where his mouth is and has invested approximately $10 billion into the Metaverse.
On the public relations level, this also helps to distance the company from the legacy family of social media apps, which have systemic issues such as being addictive, links to depression, etc.
Reason 5 (buy) - good valuation
Below, you will find my advanced valuation model for Meta, which uses a discounted cash flow model. I have predicted a conservative revenue growth rate of 11% next year and then 15% for the next two to five years. In addition, I have predicted margins to decrease (due to increased investment) from 46% to 44%.
From my valuation model, Meta is currently 20% undervalued with a fair value of $408 per share. Thus, if you are a value investor who believes in the long-term potential of Meta, you may see this as a value opportunity.
Reason 6 (sell) - mental health
Meta’s flagship platforms (Facebook and Instagram) have been linked to depression amongst many people, including teenagers . A whistleblower brought facts to light; a leaked study showed that13.5% of U.K. teen girls said Instagram worsens suicidal thoughts. Another leaked study found 17% of teen girls say their eating disorders got worse after Instagram use.
Facebook makes the majority of its revenue from advertising. The more "screen time" people spend on the platform, the better for the company. Thus, Facebook designs its algorithms to show people more of what they want. The constant likes, comments and follows causes dopamine rushes in the brain, the feel good hormone is released during activities which bring pleasure. This can cause addiction using the same mechanism as cigarettes (though not as strong).
According to The Guardian, "Social media copies gambling methods to create psychological cravings."
According to Business Insider, “Facebook has been designed to mimic addictive painkillers”
I personally rarely use Facebook now (except for business) and try to limit my usage of Instagram with app blockers. These app blockers are becoming increasingly common. A quick review of the app store shows multiple app blockers which limit screen time on apps such as Facebook or Instagram with over 5 million downloads.
Conclusion
Meta is an incredible company overall which still brings in a monstrous amount of profits ($46 billion in 2021). They have great margins and an exceptional founder.
The company's user growth slowing is a headwind for the platforms, and I suspect this is driven by various factors, including competition and the effect on people's mental health, which causes certain people to try and limit usage.
However, the stock is undervalued right now, and Zuckerberg is making a huge $10 billion bet on the Metaverse. So really, a bet on Meta is a bet on Zuckerberg and the future of the Metaverse.
