I know it looks bad, but hear me out: I think Meta Platforms Inc. (NASDAQ:META) could be the perfect value investment for 2023. Analysts project Meta could post revenue of $117 billion and earnings per share of $10.00 completely. -year 2022, which means that it is trading very close to the lowest valuation of its entire existence as a publicly traded company.
Formerly known as Facebook, Meta is the largest social media company and owns several popular platforms including Facebook, Instagram, and WhatsApp. Despite its dominance on social media, in the past year the stock has suffered due to a combination of factors, including declining ad revenue and a slowdown in Facebook user growth.
In addition, Meta has spent nearly $10 billion trying to become the Apple (NASDAQ:AAPL) of the Metaverse, a 3D version of the Internet that has so far failed to take off as expected. The above factors, along with increased regulatory pressure, especially from the European Union, have produced a lot of fear and uncertainty.
Is easy to see why. CEO Mark Zuckerberg’s pet Metaverse project, Reality Labs, has cost the company billions in both real dollars and lost opportunities. More importantly, it could turn out to be a completely foolish endeavor if not enough people jump on board the Metaverse bandwagon.
On the other hand, Meta has made a lot of progress in the VR and AR space, which means that if it’s right and millions of people around the world dive into the Metaverse, it could turn a profit for decades to come.
I personally think it’s a problem for humanity if we all decide to spend our time in the Metaverse. That doesn’t stop me from seeing the value opportunity if I’m wrong. Even if it doesn’t work that way, Meta is still a trillion dollar company masquerading as $300 billion as their social media companies definitely haven’t lost two thirds of their value.
Here are some facts:
Facebook has over 4 billion monthly active users (I’m one of them).
WhatsApp has yet to be fully monetized and has over 2 billion monthly active users.
Instagram is still going strong with over 2 billion active users per month.
Meta Platforms has $42 billion in cash and gross margins of 80%.
The company absolutely cashes out and can afford to test a new channel for future growth.
Meta has also been actively buying back its shares. It spent about $14.7 billion on buybacks in the first half of the year, which investors can expect to continue to support the company’s financial performance. Shares outstanding will drop to 2.5 billion by 2023. Despite spending a ton on Reality Labs, the company is still expected to see operational improvements in the coming years as its apps continue to rank well in the social media space. .
Social networks continue to dominate
Very little happens outside of their favorite social networks for most social media users. People are social creatures and are more likely to consume things like news and advertising if they come from a platform where they interact with other people. Mobile advertising should continue to drive business performance.
Some investors may believe that despite trading at historically low valuations, Meta is unlikely to recover in 2023. In addition to the near-term costs associated with its Metaverse project, Meta’s net income has declined more than 25% in the last two years. , and the company has taken on $10 billion in debt in its first bond issue.
While Meta remains a leader in digital advertising, it faces increased competition and regulatory issues. One big problem was that Meta faced consequences for failing to comply with the General Data Protection Regulation (GDPR), a set of European privacy rules that went into effect in 2018. The European Data Protection Board fined the company $ 275 million, a far cry from the possible $13 billion, which just goes to show the political power that Meta wields.
2023 and beyond
To be fair, who cares about short-term prospects as a value investor? If the stock price halves but the underlying business is still strong, then in theory it should be a good thing for the stock price to be lower. The question we really need to answer is, why should we bet on the company’s long-term outlook?
At the risk of sounding like a fanatic, the reason I have faith in the company is Mark Zuckerberg. He already built this incredible globally connected social media empire before he was 40 years old. So why would he bet against him for the next 20 years?
The second reason is that marketing is the lifeblood of business. Advertising is where the money is on the internet: that and selling data. Facebook is the most successful advertising platform for users and it has only scratched the surface. It has yet to monetize WhatsApp’s 2 billion users, but it plans to do so.
More importantly, companies will continue to spend billions to reach and sell to the collective Meta users, and as more companies enter the market, ad revenue will increase. The best thing Meta can do is test if it can increase costs for ad buyers and see if volume stays the same, but that’s just my opinion. Who knows, maybe it could even take advantage of advertisers fleeing Twitter.
Will Meta succeed in the Metaverse, and will it even matter? Only time will tell. There are plenty of tech companies spending billions to build virtual worlds. I don’t think it’s just the lemming effect. Additionally, many major financial institutions are working on building infrastructure for digital assets like bitcoin and ethereum, which are crucial to the Metaverse economy.
Don’t get me wrong, I personally think this is all nonsense, as the Metaverse is just an extra layer of complexity that avoids reality and is probably a bad idea for civilization. It’s like video games on steroids and as for me, I don’t want to live in a world of video games. However, in the event that I’m wrong and for 2.03 billion people switch to spending the day or part of the day in virtual worlds, Meta is likely to lead the way.
With a market cap of just over $300 billion, Meta is generating close to $30 billion in net profit on $120 billion in revenue, while roughly a third of the planet’s population logs on to one of its networking platforms. social monthly. That’s $30 per person on the top line. The business moat of this company is huge, so I don’t think Meta’s main profit engine is going to go downhill permanently.
This article first appeared on GuruFocus.