Meta Platforms (NASDAQ: META) (“FOA”) family of applications Facebook, Instagram and WhatsApp continue to interact actively and improve monetization prospects, have strong network effects and significant free cash flow. Combined with increasingly attractive valuations, the attractiveness of the stock seems irresistible.
However, the recent decline in revenue and net income, the emergence of major competitors (TikTok, not to mention Amazon (AMZN), Apple (AAPL) and Microsoft (MSFT)), indicating the erosion of market moats and shifts in fortunes, prompted CEO Mark Zuckerberg to seek a contract extension.
The size of the global metaverse market is expected to grow at a compound annual growth rate (CAGR) of 39.8% during 2022-2030. Reality Labs is betting on building an ecosystem that combines AI, AR, VR with 3D, blockchain, virtual worlds/games, online shopping, search, and competing iPhone features.
Industry 4 technologies are everywhere, and they could be at Apple. Like it or not, Apple was at war with its implementation of App Tracking Transparency (ATT); now she is about to see the fighters and run after the money. Even Microsoft smells blood.
Shares fell sharply after the company released operating and other financial results for the third quarter of 2022. However, the number of daily/monthly active families in September 2022 will be 2.93 billion and 3.71 billion, respectively, which is 4% more than last year. Facebook’s daily active users and monthly active users were 1.98 billion and 2.96 billion, respectively, up slightly from last year. So engagement is still high. So much for the claim that Meta FOA’s user base is evaporating and the company is losing market share. On such a large base, it is difficult to achieve double-digit growth. The company still dominates the social media space. Despite all the talk about TikTok, the competitor is still only a third the size of Facebook and half the size of WhatsApp, as you can see below.
In the third quarter of 2022, in-app ad impressions increased by 17% year-over-year. Quite good.
Now this is the most painful place. Revenue in Q3 2022 was $27.71 billion, down 4% year-on-year but still up 2% in constant currency. As management is quick to point out, “revenue would have been $1.79 billion higher in the third quarter of 2021 if exchange rates were constant.” Total costs and expenses were $22.05 billion, up 19% year-over-year, which is a disadvantage, but this includes an operating lease impairment loss of $413 million. Unsurprisingly, Meta laid off some employees two days after the stock surged in a tough market, hoping to cut operating costs significantly, a sign of management’s commitment to its shareholder base and profitability. (Meta also bought back $6.55 billion of Class A common stock in the third quarter of 2022. As of September 30, 2022, the company had $17.78 billion available and eligible for redemption; at Meta, shareholders matter, in after all, Zuckerberg is one of them.)
Capital expenditures, including principal finance lease payments, were $9.52 billion in the third quarter of 2022, up sharply from $7.75 billion in the second quarter of 2022. But as of September, cash, cash equivalents and liquid securities reached $41.78 billion as of June 30, 2022, which is actually more than $40.49 billion as of June 30, 2022. Long-term debt totaled $9.92 billion.
The driving force behind Meta’s decline in revenue is a slowing economy (the bond market now sees a 2023 recession as 100%), which has led to lower digital ad revenue, Apple’s App Tracking Transparency and more competition, especially from Amazon and of course , Alphabet Google (GOOG) (GOOGL). The emergence of other big players, including ByteDance’s TikTok, Microsoft’s LinkedIn, Apple, and the ad-supported streaming service Netflix (NFLX) (which is just getting started) further complicates the outlook (more on that below).
However, Meta expects total revenue in the fourth quarter of 2022 to be in the range of $3.0 billion to $32.5 billion, an increase of around 10%. Based on current exchange rates, this guidance assumes that foreign exchange will have a negative impact of approximately 7% on annual growth in total revenue. Not exactly the end of the world.
The quarterly results that could have the biggest impact on the stock are the losses from the Reality Labs launch.
We expect the vast majority of dollar cost growth in 2023 to be driven by operating expenses, with the remainder coming from cost of revenue. We expect percentage growth in operating expenses to decline significantly in 2023 as we reduce growth in non-headcount costs (…). Conversely, our revenue value growth is expected to accelerate due to infrastructure costs and, to a lesser extent, Reality Labs hardware costs driven by the release of our next generation Quest consumer headset late next year. Reality Labs fees are included in our general fee guide. We expect Reality Labs’ 2023 operating loss to rise substantially from last year. After 2023, we hope to accelerate the pace of our investment in Reality Labs so that we can achieve our long-term goal of increasing the company’s overall operating income.
Meta has a solid track record of profitability over the past few years, as shown in the table below:
From gross to net income, return on equity, return on equity and assets, and cash from operations, all major indicators have exceeded the expectations of many shareholders.
We expect capex in 2022, including capital lease payments, to be $3.2-33 billion, an upgrade from the previous range of $3-34 billion. We expect capex in 2023 to be between $3.4 billion and $39 billion through our investments in data centers, servers and network infrastructure. In 2023, increasing AI capabilities will drive all of our capital expenditures up significantly.
In essence, lower profitability due to lower revenue and higher capex due to investment in AI, reality labs and other technology/infrastructure. Meta’s EPS was impacted by Reality Labs expenses and is now expected to decline by 34% in 2022 (a 49% year-on-year decline in the third quarter, as shown above) and another 15% in 2023. But this deterioration is clearly temporary. Meta’s own earnings figures, recent layoffs, and management recommendations are all strong market signals that tell us a lot.
Thus, the recent collapse in stocks has created a unique window of opportunity. The ratings have become very convincing.
The stock chart for Meta Platforms shows the extent of the damage. Shares are still down nearly 70% from their all-time high of $384.33 hit September 1, 2021.
All of the recent time capsules reflect a large distribution. In all four of the time periods mentioned, stocks have been consistently deteriorating and trading well below their industry median. Alas, those who have held onto META for the past few months have suffered huge losses.
P/E (GAAP and non-GAAP, TTM and FWD, around 10 in total), enterprise value versus EBITDA (TTM and FWD, both well below 10), and price/cash flow all match. Stocks are cheap. Due to the recent decline in revenue, only the price per sale seems to be volatile, but as mentioned above, revenue is expected to return to growth next year. Meta’s Reels (short video) already has $1 billion in annual revenue in the second quarter of 2022 and could top $3 billion in annual revenue, one of many initiatives planned to recover revenue.
The 45 analysts who provided 12-month price predictions for Meta Platforms have an average target (rather conservative, stay tuned in the coming weeks) at 140.00, overvalued at 250.00 and undervalued at 80.00. The median score represents a +25.21% increase over the last price of 111.81.
So the business remains fundamentally healthy but trades at a discount. However, the bottom line was subdued as the digital advertising market slowed, Apple’s App Tracking Transparency implementation and increased competition pushed revenue down, prompting executives to seek upgrades and increase investment in Reality Labs and AI. There is a reason for the huge amount of money to be deployed.
Changing Apple’s privacy policy to automatically block data tracking unless iPhone users specifically sign up could cost Meta as much as $10 billion in potential lost revenue this year.
META has been hit hard. Only 25% of iOS users sign up, and that number seems to be fairly stable (or only slightly improving) over the past few months.
As of September 2022, Apple has a market share of 55.45%, according to the latest smartphone usage data in the US. As a result, Apple’s privacy policy changes have had a huge impact on the digital advertising market, especially on social media companies.
Meta may be more vulnerable than some of its competitors, namely Amazon, whose ad algorithms run on their own proprietary data, and Alphabet, which may use multiple alternative ecosystems of nine different services, each supported by over 1 billion users – Android , Chrome, Gmail, Google Drive, Google Maps, Google Search, Google Play Store, YouTube, and Google Photos. (Google answers more than 3 trillion searches a year, and more than half of the world’s population is a direct consumer of its services.) As powerful as the social networking network is, Meta doesn’t have that moat, and the CEO may feel pain. Like it or not, Apple has gone to war with their implementation of App Tracking Transparency; now she is about to see the fighters and run after the money.
GlobalData (Grand View Research) estimates that “the global metaverse industry will grow from $22.79B in 2021 to $996.42B in 2030″ with a compound annual growth rate of 39.8% from 2022 to 2030 year. (“Metaverse Market Size, Share, Trends, Analysis and Forecast 2022-2030 by Vertical, Component Set, Region and Segment”). This growth has been exponential, not linear, which is perhaps why many people do not yet realize the full extent of the changes that are coming.
The Metaverse, a virtual world where users can share experiences and interact in real time through simulated agents, avatars and scenes, is still in its infancy and its full impact has yet to be determined. But he has the potential to change lives – professionally and personally. Over time, it’s more likely that Apple’s iPhone will create a strong competitive alternative (why not Alphabet’s Amazon and Google Search ecosystem?).
Thus, Reality Labs is betting on creating a universe of Industry 4 technologies, including artificial intelligence, augmented reality, virtual reality, 3D, blockchain, games, online shopping and more, and it can be on par with Apple and other competitors. VR & AR are critical technologies spearheading the development of the metaverse, but they’re only the beginning. VR & AR are critical technologies spearheading the development of the metaverse, but they’re only the beginning. VR and AR are critical technologies leading the way for the metaverse, but this is just the beginning. VR and AR are key technologies driving the development of the metaverse, but this is only the beginning.
Metaverse includes nine key technologies: Network Appliance and Cloud Infrastructure, Data Management and Security, Blockchain and Cryptocurrency/NFT, AI/ML, AR and VR, AdTech (Online Advertising), Games, Enterprise Applications and Payment Platform.
The global service addressable market is categorized into hardware, software & services. The global service addressable market is categorized into hardware, software & services. The global address market for services is subdivided into hardware, software and services. The global address market for services is segmented into hardware, software and services. The hardware segment includes market sizes for cloud infrastructure, 5G infrastructure, headsets, wearables, IoT, and other mobile devices. As prototypes become available, VR headsets are expected to be rapidly adopted. For example, Meta’s Reality Labs showcased a number of prototypes to help develop a roadmap for VR graphics. While not yet commercialized, the prototyping hardware segment represents a lucrative revenue opportunity for the virtual universe industry as a whole (…). The speed and commitment of headset hardware vendors is a measure of Metaverse’s acceleration, creating opportunities for the Metaverse hardware segment.
The software service addressable market is also expected to witness rapid growth during 2022 to 2030. The segment primarily encapsulates, platforms/software including Artificial Intelligence (‘AI’), Augmented Reality (‘AR’), Virtual Reality (‘VR’) alongside 3D & spatial tech, blockchain, virtual worlds and games. The software service addressable market is also expected to witness rapid growth during 2022 to 2030. The segment primarily encapsulates, platforms/software including Artificial Intelligence (‘AI’), Augmented Reality (‘AR’), Virtual Reality (‘VR’) alongside 3D & spatial tech, blockchain, virtual worlds and games. The targeted software services market is also expected to show rapid growth between 2022 and 2030. 3D and spatial technologies, blockchain, virtual worlds and games. The targeted software services market is also expected to grow rapidly in 2022-2030. This segment mainly includes platforms/software, including artificial intelligence (“AI”), augmented reality (“AR”), virtual reality (“VR”), as well as 3D and spatial technologies, blockchain, virtual worlds and games . Apart from VR, AR is at the heart of the Metaverse (…).
The excitement around the Metaverse is mostly focused on consumer use cases. Gaming and social media companies lead the way, but businesses will continue to lead for the next five years. This shift will be driven by the current future of work and digital transformation initiatives across industries ranging from retail to healthcare and financial services. Big Tech is backing Metaverse, which Microsoft and Meta are promoting as the perfect environment to support hybrid work.
Number of applications (gaming, social, communication, online shopping, etc.), technologies involved (augmented virtual reality, Internet of things, artificial intelligence, robotics) and target verticals (automotive, electrical and electronic equipment, healthcare, etc.) .). ) fully illustrates the possibility.
Interestingly, in addition to gaming and entertainment, the healthcare industry is expected to experience some of the highest levels of virtual reality disruption. Education, workforce development, manufacturing, automotive and marketing, logistics, military, and retail may also face significant changes brought about by immersive technology.
Given the stakes and opportunities, it’s no wonder there’s growing interest in finding strong partners across the Metaverse ecosystem. In June 2020, Meta itself acquired virtual reality video game developer Ready at Dawn.
M&A activity is picking up, with access to technology being the key rationale for most deals. M&A activity is picking up, with access to technology being the key rationale for most deals. M&A activity is on the rise, with access to technology being the main driver behind most deals. M&A activity is on the rise and access to technology is a key driver behind most transactions. AR, VR, AI and blockchain solution providers are becoming top targets for acquirers looking to develop new experiences.
We believe that blockchain and encryption technology is causing a wave of change in the existing business model of the Internet. Today’s Internet is largely run by a handful of centralized companies that have access to and profit from users’ personal data. We believe that Web3 will be owned by developers and users and curated by cryptographic tokens, creating a more decentralized and community-driven version of the Internet.
The latest major M&A deal related to the Metaverse industry could be Microsoft’s acquisition of game publisher Activision Blizzard in January 2022. The next five years are likely to see more mergers and acquisitions related to Metaverse.
To gain momentum, Meta also forged several groundbreaking partnerships. The last one is a partnership with Microsoft. Companies will look to integrate key Microsoft applications with VR and the Meta universe to enable potential 3D versions of Microsoft Office 365 applications and immersive Teams meetings. Similarly, Verizon (VZ) and Meta have struck a deal to explore the possibilities of the 5G metaverse. Can telcos see an alternative to the capabilities of the iPhone?
The sheer scale and availability of information about component stacks certainly makes it clear that the Metaverse is not all about headphones, glasses, and oddities. Zuckerberg would probably be willing to create a coherent, compelling alternative to major competing technologies and pain points, including the iPhone itself. Google has tried with its 2% market share (see above), but so far without success. Meta holds the lion’s share of the VR/AR market in the US, which gives the company hope. The fact that Apple is considering entering the market also hints at what is at stake. Other data sources come to the same conclusion: the segment is dominated by meta.
There’s a lot of new hardware coming in the next few years, but there doesn’t seem to be a hardware competitor that will make the Metaverse as relevant as the iPhone. The importance of headphones cannot be underestimated(…).
However, it is clear that the meta is struggling with this, and perhaps the importance of the typeface is best explained as a starting point for redefining the entire ecosystem and the metaverse itself.
Of course, bullish case risks abound. The Meta, Facebook, Instagram and WhatsApp family of apps is not generating enough revenue and profit growth due to increased competition from Google, Amazon, LinkedIn, owned by Alphabet, TikTok, Netflix, not to mention Elon Musk’s Twitter. ) to the emergence of other metaverse alternatives, including the very current NVIDIA Omniverse. Whether the Metaverse itself is capable of creating a compelling alternative to Apple’s iPhone or the Amazon ecosystem, of course, remains to be determined. If necessary, add economic and market risk (crisis, inflation, stock market crash, etc.). But Meta’s CEO, who has about 54% of the voting power in the company (due to his 10-1 vote right before the IPO), might think that Meta should define the next computing (mobile) ecosystem, or at least , confirm it to Apple. before rethinking your economic moat. As such, he is willing and able to spearhead the deployment of large-scale real-world AI-related labs, as well as other potentially game-changing investments, to revitalize growth and (re-)capture technology leadership, which I believe could eventually redefine the industry. .
At current prices, even after the last few days of growth, Meta Platforms could present a significant wealth creation opportunity for long-term investors. The company has the right:
I think the stock has solid upside potential over the next five years. Bullish investors should start accumulating decisively. The more cautious—those who are waiting for more information about Meta Platforms’ future sales, cash flow, earnings, and Reality Labs rates—may prefer cost averaging.
Disclosure: I/we have a profitable long position in META stock through stock ownership, options or other derivatives. This article was written by me and expresses my own opinion. I did not receive any compensation (except for Seeking Alpha). I have no business relationship with any of the companies listed in this article.
Post time: Dec-02-2022