Galeanu Mihai
Thesis:
Meta Platforms’ (NASDAQ:META) valuation is becoming increasingly more attractive as share prices continue to drop. Meta stock is down 66.4% since highs reached in August of 2021. Aside from general economic turmoil associated with interest rate hikes and inflation, this is likely due to Meta’s stiff competition with TikTok. While TikTok certainly poses a threat to Meta’s ad revenue, I don’t think it has been substantial enough to justify the 66.4% decline in Meta’s share price. Meta still possesses a staunch lead in monthly active users (MAUs), is producing impressive financial results, and caters to better age demographics with its ad services. I can’t help but look at Meta shares with more temptation as prices continue to fall.
Meta’s Facebook vs. TikTok:
Meta’s social media platforms have been in a league of their own for quite some time, especially since the company acquired Instagram in 2012 for a mere $1 billion. As of 2Q22, Meta’s Facebook has 2.934 billion MAUs, nearly three times TikTok’s 1 billion MAUs.
Considering the concern with Meta stock is tied to ad revenue, I think it’s important to look at age demographics. While I don’t have much global data for TikTok’s age demographics, I do have some U.S. figures. Here’s the percentage of TikTok users by age: 32.5% are 10-19, 29.5% are 20-29, 16.4% are 30-39, 13.9% are 40-49, and 7.1% are 50 or older.
Here’s the percentage of Facebook users by age in the U.S: 4.2% are 13-17, 18.2% are 18-24, 23.6% are 25-34, 18.1% are 35-44, 13.7% are 45-54, 11.1% are 55-64, and 11.1% are 65 or older.
What we see here is that TikTok’s largest user base is in its youngest age group, ranging from 10-19 years old. Facebook’s largest user base is in its third youngest age group ranging from 25-34 years old. I find this to be quite a positive aspect for Meta considering the majority of consumer spending comes from older consumers. According to Visa, consumers over 50 account for more than half of all spending in the U.S. Based on the data above regarding Facebook’s users by age, roughly 29% of U.S. users are 50 or older. Facebook’s users by age bode well for Meta when considering consumers by age, as roughly 53% of Facebook users are age 25-34 and 50 or older. It’s not hard to realize the fact that older consumers have far more money to spend than people aged 10-19.
It’s also worth noting that Meta is generating far more income from its users than TikTok is. Meta generated $114.934 billion in ad revenue, while TikTok generated roughly $4 billion. This means Meta has roughly 3 times the MAUs as TikTok but is generating 28.7 times the revenue from them. In short, Meta’s Facebook is larger, generates 28.7 time more revenue per MAU, and is targeting consumers with more disposable income. While TikTok is achieving great success, I don’t think it’s concerning enough to justify Meta’s 66.4% decline in share price.
(Note: Facebook MAUs and FY21 ad revenue were sourced from ‘Meta Reports Second Quarter 2022 Results.’)
Macroeconomic turmoil is Meta’s true threat:
The broader market has been in complete turmoil this year. The market observed quantitative easing, interest rates on the floor, and stimulus checks. As the market was flooded with capital, stocks were reaching all time highs while consumers were spending. This led to highly valued stocks and a higher demand for consumer goods, increasing the prices of said goods (inflation). On top of that, global supply chain disruptions further exacerbated prices, such as food, computer parts, automotive parts, oil, etc. As inflation started running rampant, the Fed rapidly hiked rates as a counter measure. However, it takes time for fiscal policies to achieve recourse. While the market was left waiting for rate hikes to stave off inflation, rate hikes immediately impact consumer buying power. Tie that in with inflated consumer goods prices, and the U.S. is on the verge of a recession. Consumers have less money to spend, reducing corporate revenues. Corporations also see interest expenses significantly increase. As corporate bottom-lines weaken and consumers sell stock to support their own struggling finances, stock prices tank.
It’s clear how this is not a good situation for Meta, or anyone for the matter. Meta makes money from ad spend. As businesses cut back on ad spending and consumers cut back on spending, Meta is bound to face some headwinds. I find the current macroeconomic turmoil to be a much larger threat to Meta’s business and stock than TikTok. With additional rate hikes on the way and inflation levels still north of 8%, TikTok is likely on the lesser end of Meta’s concerns.
I personally believe this market pullback is going to linger deep into 2023, if not into 2024. That said, these pullbacks are necessary for a healthy market and create incredible buying opportunities for investors. While Meta’s share price will likely fall more, the current valuation is already looking opportunistic.
The digital ad market and where Facebook stands:
Digital advertising is the new-and far better-way of reaching potential customers. It’s one of the larger markets in the world and is still expected to exhibit favorable growth moving forward. A Yahoo report estimates the global digital ad market to be $476.9 billion in FY22 and grow at a CAGR of 13.9% through FY26, reflecting a global digital ad market of $786.2 billion by FY26. There are several reports I could use on the global digital ad market; however, all seem to be in the ballpark of the high $400 to low $500 billion figures with a CAGR in the teens moving forward. Should Yahoo’s estimate be accurate, Meta’s Facebook would possess a market share of 24.1% based on its FY21 ad revenue. This would put them only behind Alphabet (GOOG), who holds a market share of 35% – 40% (Source: my recent article covering Alphabet).
In short, Meta’s Facebook is the second largest digital ad provider in the world, servicing a market that is rapidly approaching a $1 trillion valuation as its still exhibiting double-digit growth. Meta faces competition with the likes of Alphabet and TikTok; however, it stands apart from Alphabet as a social media platform and TikTok with an advantage in age demographics and market presence.
Meta is producing solid financial results:
Meta revenues don’t appear to be in as much trouble as the market has seemed to price in. Meta’s 2Q22 revenue came in at 28.82 billion, only down 0.9% from 2Q21. Considering inflation, interest rate hikes, and the growth of TikTok, less than a 1% loss from the same quarter last year isn’t terrible. While net income has taken a hit-down 36% on a year-over-year basis for 2Q22-Meta invested quite heavily in 2Q22. Meta spent $7.528 billion on PPE in 2Q22, roughly $3 billion more than in 2Q21. This investment led to a significant increase in SG&A and General & Administrative expenses, as both combined are up $2.3 billion compared to 2Q21. Additionally, R&D expenses for 2Q22 are up roughly $2.5 billion compared to 2Q21. The increased cost of doing business and research and development have hit Meta’s bottom line hard, however, they do appear to primarily be associated with investment initiatives.
Meta’s valuation is getting quite attractive when looking at earnings and free cash flow. Meta TTM EPS sit at $12.07, with TTM free cash flow sitting at $12.89 per share. This brings Meta’s P/E ratio to 10.66 and P/FCF ratio to 9.985. Over the past five years, Meta’s average P/E and P/FCF ratios have been 26.44 and 28.75, respectively. While I don’t believe that Meta should be trading at these ratios above 25, I do think the company deserves to be trading 15 times free cash flow. That said, I believe a fair market value for Meta shares to be in the ballpark of $193 per share, representing 50% upside from current prices.
Here’s also a quick look at how solid Meta’s balance sheet is:
- Cash on hand as of 2Q22: $40.49 billion.
- Retained earnings as of 2Q22: $69.25 billion.
- Shareholder equity as of 2Q22: $125.77 billion.
- Debt-to-equity ratio as of 2Q22: No debt, 0.
- Current ratio as of 2Q22: 2.52.
I’m not finding much to be concerned about when it comes to Meta’s balance sheet. I suppose the current ratio could be a bit higher, but generally speaking anything above two is usually quite sufficient. I see plenty of cash and shareholder equity, retained earnings growth, no debt, and more than enough current assets to cover current liabilities.
(Note: Financial data sourced from ycharts.com.)
Conclusion:
In conclusion, Meta’s valuation is getting more attractive with every dollar it drops. The company is trading well below average valuation multiples, has a solid balance sheet, and is the second largest digital ad provider in the world. The recent collapse in share price is understandable, as the economy is dealing with a slew of financial problems that will negatively impact Meta’s bottom line.
I am not too concerned about TikTok just yet, as Facebook is much larger, far more profitable based on revenue per MAU, and services better age demographics. I believe macroeconomic turmoil and Alphabet pose greater risks to Meta’s success. While Meta’s share price will likely see further declines, the current valuation is already attractive. I personally believe the Dow is going to fall to levels between $24,00 – $27,000. I could see Meta falling roughly another 10% – 15% as well.
I’m comfortable recommending initiating a position in Meta at current price levels, although I would recommend keeping additional capital on hand to cost average down. Meta is an incredibly strong buy at price levels of $115 per share or lower, and I do think the market could take Meta’s share price there.
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