Sep 15, 202212 min read

Meta Platforms, Inc. - Equity Analysis

Updated: Dec 4, 2023

GENERAL ANALYSIS

Company description

Meta platforms, previously known as TheFacebook Inc., is an American multinational conglomerate based in California, it is the owner of major social medias such as Facebook, Instagram and Whatsapp. It is one of the best performing American technology companies and it’s part of the FAANG, which is an acronym widely spread among investors, used to refer to Facebook, Amazon, Apple, Netflix and Alphabet (Google).

It was founded in 2004 by Mark Zuckerberg (who is currently chairman and CEO), Eduardo Saverin, Andrew McCollum, Dustin Moskovitz and Chris Hughes and filed for an IPO in 2012 reaching a valuation of $104 billion, the largest valuation for a newly public company. In 2014 acquired Oculus for $2.3 billion and founded Libra Networks to develop his own cryptocurrency.

Largest institutional shareholders are Vanguard Group, Blackrock, FMR and State Street that together own over 22% of the company, while Mark Zuckerberg keeps the largest ownership with 29.3%.

Performance

During last year the price of Meta has fallen and as of today it’s 112% down from the all-time high, which was registered exactly one year ago, in August; the same has happened to Nasdaq-100 index, which has decreased by 14% in the last year. The reason why Meta stock price is decreased so much is the platform has lost a lot of active daily users ( about 1 million in one quarter), and it’s the first time happening since its foundation, when it was first announced on March 3rd Meta lost over 26% in just one day, it has been the largest loss in one day ever, resulting in Zuckerberg’s net worth decreasing by billions of dollars and made Meta get out of the top ten companies in the world by market capitalization. Meta generated revenue of $28.8 billion, down 1% year over year and the first such decline in its history. The company cited currency headwinds caused by a strong dollar. On a constant currency basis, revenue would have grown 3%. Operating expenses jumped 22% year over year to $20.4 billion, weighing heavily on the bottom line, as diluted earnings per share (EPS) of $2.46 sank 32%. To give those results context, analysts' estimates were calling for revenue of $28.9 billion and EPS of $2.54, so Meta missed expectations on both counts. Other metrics pointed to the challenges faced by the social media behemoth. Daily active users (DAUs) climbed to 1.97 billion, up 3% year over year, while monthly active users (MAUs) increased 1% during the same time frame. There was an expected sequential decline in MAUs, from 2.94 billion to 2.93 billion, which Meta attributed to "internet blocks related to the war in Ukraine." This performance could be caused also by the rise in popularity of TikTok, which reached 1 billion active users, and the rise of BeReal, another social network widely spread in the United States, which aims to overtake Instagram and recently reached 10 million active users daily.

Facebook’s rebranding

At the end of 2021 Facebook’s CEO announced that the company changed its name to Meta, which should be a step towards the development of the metaverse - a digital world which moves parallel to the real one. Zuckerberg believes that the metaverse will be a feeling presence in the future, so he decided to shift away from social networks only in order to not being identified with Facebook only, as the previous name suggested. The company is trying to focus more on VR/AR and after Oculus it wanted to buy Within Unlimited, but the FTC is stopping Meta because this would lead to the monopolization of the market.

Market Analysis

As it’s shown in the image Meta is present mostly in North America, Europe and Asia-Pacific, with the US and Canada being their largest market which accounts for half their revenue. Their main source of revenue is advertising, which makes up for 97% of it; while the major expenses are for R&D and costs the company 21% of the revenue. Even though most of the revenue comes from US and Canada, it’s in Asia where the company has the most users and this is explained by looking at the population size, since China and India are the most populous countries in the world. However Meta earns more with American users probably because they spend more on advertising and buy more through the marketplace.

Global background

The last 2 years between Covid and recession have been quite difficult for companies; in particular digital advertising has suffered quite a lot as an effect of rising in cost of capital, which passed 12%, Fed hiking interest rates and shifting investments towards obligations and treasuries, and the inflation which reached 8% forced companies such as Meta to reduce their expenses and reduced the number of insertions, which are Meta’s main source of revenue, even Mark Zuckerberg announced some slowdowns in the next period, including limiting the intake and the same happened to Google.

Moreover we need to consider the role the War in Ukraine took. From the beginning Meta has aligned with the general opinion, supporting Ukraine by allowing graphic videos and images of Russia's attacks, protecting the online speech of Ukrainians, shattering the neutrality myth. The War has some consequences on the market, since raw materials and energy supply are running out for the restrictions on international trading imposed by UE their prices will continue to rise, this is reflected in the CPI being consistently higher, reducing purchasing power having as effect a possible recession.

SWOT Analysis

Strengths

Facebook has led the market of social networks for the last 15 years and has around 2 billion users;
It owns Instagram, Facebook and Whatsapp;
The CEO, Mark Zuckerberg is known for his acumen and leadership;
It is one of the most spread sources of news;
It has a strong brand vital for stability and long-term sustainability;
It is one of the global leaders in R&D spending.

Weaknesses

Having just one main source of income, which is advertising, makes the company vulnerable;
It is too dependent on the figure of its founder;
Fake news spreading has been recently under the news interest and this could lead to a legislative intervention that can limit the company;
A growing number of fake accounts and scams are damaging the company’s image

Opportunities

The rising of the metaverse consists of a tangible opportunity to increase revenue sources and to expand its control on other forms of entertainment;
High level of capabilities to properly analyze data allow Meta to understand trends before others;
Using all the data to produce more effective and efficient advertising;
Libra, a blockchain-based payment system, could replace PayPal.

Threats

The growth of TikTok and BeReal can steal many users from Meta;
In the next few years decentralization and data protection could damage Meta advertising and could lead to other scandals;
The increase in regulation that Meta needs to comply with;
Political threats: China, Iran and Russia have already banned Facebook damaging the company’s international development and other countries have threatened the same if the company doesn’t comply with local law

FINANCIAL ANALYSIS

Introduction

Analyzing the company’s balance sheet can make us understand better the state of “health”, by considering various information and comparing them to other similar companies or by comparing them to the mean of the sector. We will take into consideration the previous performance for the last 5 years and make some predictions for the future by studying for example total debt, equity, free cash flow and other ratios often used in equity analysis.

Liquidity

Liquidity can be calculated with 3 different ratios: current ratio, quick ratio and cash ratio. The first one takes into account current assets and divides them by current liabilities, the second one sums up cash, short term marketable investments and receivables and divides them by current liabilities, while the last one sums only cash and short term marketable investments. Currently they’re all between 2 and 3 and it is a good range of value, in line with the sector average, but if this downward trend continues they could go under 1 which means that the business has more debt than assets and could lead to insolvency.

Another interesting ratio is the solvency ratio, which considers a long term prospective and divides long term debt by equity, which is equal to 10% and it means that in the long term the company is solvent.

Profitability

To study the profitability of the company we consider its ROE, ROIC, revenue and profit margin and see how they changed over the course of the last 5 years.

Starting from the revenue we can see that it has grown of 190% over 5 years with a mean of 24% per year, which is ideal since a good value is considered between 15% and 25% and it shows how the company has overcome Covid, since even during 2020-2021 it continued to increase. The same happened to the EBITDA, another figure well-known to investors. Related to the revenue it’s important to analyze the profit margin, that is the difference between what the company earns and what it spends, as we can see the revenue is growing faster than the profit, meaning that the costs are growing more than the net income.

3-steps DuPont analysis

Its net profit margins at June 2022 is 28% which is quite high considering that a 20% is already good enough, and in the last few years has been even higher. Meta improved its asset turnover meaning that it’s using all the resources. While the financial leverage is higher than 1 and means that the company has been financing its growth with debt, what is concerning is that it has been increasing in the last 4 years and it’s not positive, since the company is already stable, but this could be linked with the costs for the expansion in the VR and metaverse. Moving on, the two indices that show the profitability of an investment are the return on equity (ROE) and the return on invested capital (ROIC). ROE has grown by 5% each year on average, reaching in 2021 32% which is really high, also higher than the average for the information services industry which is at 17%. Also ROIC has followed the same trend, growing by 7% each year and reaching 27% in 2021.

Stock valuation

To determine what is the intrinsic value of an asset we can use both a DCF model, which takes into account the expected free cash flow and discounts it back to the actual value and a comparable analysis which considers other similar companies value and EBITDA. For the Discounted Cash Flow model we calculate the tax-effected EBIT, then we add depreciation and amortization and subtract capital expenditure and changes in working capital to obtain free cash flow which we can use to make some projections for the next few years. After that we can calculate WACC (weighted average cost of capital):

WACC = (E/V x Re) + ((D/V x Rd) x (1 – T))

It considers the risk-free rate of return which usually is the 10-year Treasury rate and it’s currently at 3%, the expected market return, the beta, which is the constant of correlation between the stock price and S&P 500 measuring the volatility or systematic risk of a portfolio compared to the market, being 1 a perfect correlation, Meta’s beta is 1.33; after that it’s considered the tax rate, the cost of equity and the cost of debt which is currently at 5%. Then we should calculate the expected future value of free cash flow and discount it to the present value using WACC. At this point we could perform the perpetuity growth rate method or the EBITDA multiple method, by following the EBITDA multiple method the present value of the company is $583.6 billion which means an intrinsic share price of $186.24.

The comparable analysis is not as precise as the DCF because there are not many companies similar to Meta and their EV/EBITDA ratio is quite different, however we decided to report what we got. We choose as possible competitors for Meta Twitter, Tencent and Pinterest since other social networks such as TikTok and Youtube have no information available. We calculated the equity value by adding up the expected enterprise value, cash and cash equivalents and subtracting minority interest and debt, reaching an intrinsic valuation of $235.2, not far from the DCF one.

Another method which can be used to find the intrinsic value, but it is not as rigorous as the other two but we think it could increase the number of controls and help us have another value to reflect on. It relies on the growth rate of the last 5 years, free cash flow, P/E ratio, the minimum rate of return for the investment and the margin of safety you want to apply. In this case we took a 25% margin of safety, a 25% minimum rate of return and an 8% growth rate. First we make provisions for the FCF and at the end we multiply it by the current P/E and then we discount it back at the minimum rate of return. If we subtract the margin of safety we end with an intrinsic valuation of $214.58, in line with the other valuations.

Considering the current price which is at $160 we can see how theoretically the company is undervalued.

Multiples analysis

It’s common to also study multiples, which are derived by the balance sheets and could be compared to other companies and explain the financial solidity of a firm with some ratios. Multiples can be referred to balance sheet, enterprise value or price per share and market value. Some of them were already studied in the profitability paragraph, where we spoke about ROE and ROIC. Revenue based multiples are the easiest to compare between different countries.

P/E ratio, which was used for the intrinsic value analysis is calculated by dividing the price per share by the earnings per share (EPS); as of today Meta has a P/E of 24, and in the next few years it’s expected to decrease, but this value is already good, since the market average is between 20-25 and the sector average is at 28, which means that the sector is a bit overvalued.

Remaining on price-related multiples we should consider also P/CF, which divides the price per share by the operating cash flow per share, it is not useful to compare different companies because of the different legislation and amortization policies, but it’s useful to see if the company is solid enough to withstand future problems. Meta’s P/CF is currently at 16.7 and it is quite high considering that a good ratio would be below 10, meaning that the price is too high or the operating cash flow is too low. After that we analyzed P/BV, which confronts the market capitalization with the book value, however it is quite easy for companies to adjust this value as a consequence of different accounting policies for every country. As of today the value is 7.7, which is quite higher than

the average for the sector, which is slightly over 6, meaning that the company could be a bit overvalued.

Moving on, we considered PEG ratio, which is similar to P/E ratio but it takes into account also the earning’s expected growth, in this case it is 0.9, which is great, since companies are growing; however it expected for the next 5 years to reach 2.3 which is not a good news, meaning that the stock would be overvalued. Not necessarily this is an awful prediction, because it means that the price of the stock could rise, and overprice the company, while, for a growth investor, this prediction is terrible. To conclude multiple valuation we go back to the last paragraph where we used EV/EBITDA which should be under 10 to consider a company undervalued, and Meta is just below, at 8.6 in 2022.

Although in the last 5 years it has always been well over 10, reaching the peak of 25 in 2017. The reason for this is found in the recent crash that Meta experienced that reduced quite a lot of its enterprise value. But as we can see from this analysis Meta seems quite solid and most of its values are in an healthy range.

Piotroski score

Piotroski score is used to determine the best value stocks on a scale from zero being the worst to nine being the best; even if Meta is generally considered a growth stock, since it belongs to the fastest developing sector (technology) and with the rise of Metaverse has a great opportunity to increase its value, as of today it has lost more than 53% YTD so for this analysis it is not wrong to consider it a value stock, also for its relatively low P/E. It is divided into 3 categories: profitability, leverage and liquidity, operating efficiency. For profitability we have a positive net income (+1), a positive ROA (+1), a positive CFO (+1) and the earnings quality, being the CFO higher than the net income is positive (+1). Moving on leverage and liquidity we have an increase in long term debt (+0), a lower current ratio than last year (+0) and no new shares (+1). Lastly, for operating efficiency we have almost the same gross margin, so for a prudent valuation we give 0 points, and a higher asset turnover ratio (+1). So we end up with a score of 6 out of 9.

Risks

First of all we have the recession which has spread in the US, with the demand for advertising that has decreased, not only for Meta, but also for Snapchat and Twitter. Secondly the bet on the metaverse which led to the rebranding, the acquisition of Oculus and the creation of Reality Labs which are losing over $10 billion per year for the high costs for R&D. Next, the core business of Meta is changing, trying to “copy” what TikTok is doing, even if it is not profitable and Facebook dominance could erode with the rising social networks (BeReal, TikTok…). Lastly there is the possibility of new scandals emerging regarding data usage, as happened in 2018, which would mine Meta’s reputation.

Disclaimer

This content has educational purpose only, it should not be intended as financial advice. All the content doesn’t constitute a recommendation to buy or sell any securities or any other financial instrument both in Italy and in any other country.

Additional resources

Meta condensed consolidated balance sheet