Meta Thesis
A Long term play
Meta Analysis
Summary
Management
Founder lead
Long term oriented
Competitive advantage
Network Moat
Largest by subscribers
Margin of Safety price point
Ten Cap entry $199.10
DCF entry $160.00
Current stock price - $164.70
Expected long term Stock Price $320.00
The Company
Meta, previously known as Facebook, is a technology company that owns Facebook, Instagram, and WhatsApp. The company went public just over 10 years ago and has been steadily growing ever since. Marc Zuckerberg, the founder of the company, is still at the helm. Meta has recently entered into the AI, and VR technology software and hardware business.
The Story
Meta generates almost all of their revenue today from advertising. They were extremely successful at this because they were able to gather incredible amounts of data from their users and utilize it for targeted marketing programs. Facebook also was one of the first social media companies to be created, and had an ever growing population that could be marketed to through a single platform. This combination gives them and incredible competitive advantage over say a news paper, radio, billboard, or other type of mass marketing because they can target certain individuals who may be more willing to purchase or pick up on a advertisers message.
In addition to having the largest subscriber base of any Social Media company, (2.87b daily active users) they have also been investing in other businesses such as Artificial Intelligence, and Virtual Reality. These additional business lines are intended to further their competitive advantage and ensure that they exist long into the future. Only time will tell if these initiatives pay off.
At Black Opal, we can envision a time in the future where a person may want to attend a virtual concert, live sporting event, class, tour, or location from the comfort of their own home. We see VR or AR as a bolt on solution to already available events. In this scenario it becomes a benefit not only for consumers, but also event organizers, artists, tourism, and Meta.
For Example, we imagine a user purchasing lower cost tickets to a Formula 1 event. The Consumer saves money on travel and accommodation, is able to select a seat with a better viewing position than if they had attended the live event. The also get benefits of live data feeds regarding the race. They get the sounds and excitement of the crowed with spatial audio and can interact in real time with other virtual attendees. The Consumer may decide to purchase lower cost virtual merchandise for their avatar and will have individualized product placement and advertisements based on predictive algorithms. In this world, the possibilities are endless for revenue generation, and the benefits are shared.
The Evaluation
10 Cap Evaluation
At Black Opal we value businesses as if we were going to buy the entire thing. Our Ten Cap analysis is very simple. It ensures that if we purchased the whole business, we would get a return of our entire initial investment over a ten year period. This analysis does not include any growth metrics and assumes that the business will be steady and constant throughout time.
For Meta, there are a few difficulties that come into play and we have to make some general assumptions. First, we want to understand how much of the Capital expenditures are used for maintaining the business as opposed to growing it. Only a portion of the capital expenditures that Meta has are required to maintain the business at its current position and another portion is required to ensure continued growth of the business. Meta does not break down this metric in their Annual Reports.
For example, Meta added reels to Facebook. This adds a significant additional requirement for computing power which can be seen in their capital expenditures. To date, reels has not be fully monetized, and the extent of additional servers and computing power is difficult to calculate.
Using the 2021 Annual Report, Meta had $18.5b in Purchases of PPE. This is the total capital expenditure cost that they incurred but is not the Maintenance cost that we are looking for. We know that some portion of that is being spent on growth for Reality labs, and another portion is being spent on additional data centers and servers to support growth of subscribers and additional video content. Meta does not break down these costs well but they do break down what the PPE was in note 7.
We see that they increased their Severs and network assets by about $5b. We also know that they depreciate their servers over a 4 year period. Assuming that they depreciated their 2020 servers by 25% they would have had 5bn in severs depreciated by the end of 2021. If we also assume that their 4 year amortization is the actual useful life of that equipment, then we can calculate the cost of server replacements annually to replace what already exists. The Cost is $6b,
If the company does not build any more data centers because they aren't growing, there would be no additional land or acquisition costs. There will be some building maintenance costs. We will add the building cost from 2021 to our maintenance capital. We know that the entirety of it is not a maintenance cost but we are unable to quantify the portion attributed to growth. We will err on the side of caution and utilize the entire $5b as maintenance capital.
The 2021 annual report tells us that Cash Flow from Operations came in around 39.4b. If we subtract the maintenance capex from this we get $57.68-$11=$46.68b. If we add the taxes back in to see what we would have made pre tax if we owned the entire business, we get $46.68+$7.9=$54.58b. This is the amount we as the hypothetical owner of Meta would walk away with at the end of 2021.
At the time of release of the 2021 annual report, there were 2.741b shares outstanding.
$54.58/$2.741=$19.91/share. This is the annual take home cash per share..
To obtain a payback of our capital over ten years, we would need to buy Meta at or below $199.10/ share.
DCF Evaluation
In order to ensure that we have multiple different ways to look at the value of a business, we also complete a DCF evaluation. We utilize 15% annual returns and are always looking to enter every position with a margin of safety so that even when we are wrong, we don’t lose money.
Meta has been growing earnings at a healthy rate for the last 5 years with a growth rate of about 30%. They have increasing and high ROIC and ROE rates around 18 and 19% respectively. These kinds of numbers tell us that this business has been well run historically, and is laser focused on appropriate capital allocation.
With Meta's move into AI and VR or AR, we believe there is still room for growth and expansion. Unfortunately based on the current revenue generation and user base size, we find It difficult to see significant double digit growth multiples continuing long into the future. It is for that reason that we could see a 10 year CAGR for Meta earnings aligning in the mid to high single digit growth.
In 2021 Meta had $13.99/share earnings. By using an 8% growth rate for the next ten years, we think that Meta will be generating close to $30.00/share. We believe that based on these assumptions a fair value per share for meta is around $320.00. Our entry point will be around $160.00/share.
Current Event
Meta is currently going through a few different events at the same time that are all affecting their current stock price. Firstly that are now at the point that management has been warning of with subscribers. As of the release of the 2021 Annual report, Meta has 3.59b monthly active people. As the business obtains more subscribers, it gets increasingly harder to add meaningful increases year over year.
The second event that is affecting Meta came to light as a result of changes to Apples IOS operating system. The new operating system blocks Meta's ability to follow its users electronic signatures to all the locations that that user goes. This means that Meta now has less data about their users. Since meta utilizes algorithms and AI driven advertising, this makes it more difficult to provide the increasingly consumer focused marketing that Meta provided in the past.
Lastly, a macroeconomic event is currently taking place where we are experiencing high inflation. This high inflation along with raising interest rates to stem that inflation should put the damper on the demand side for consumers ultimately driving a recession. This could negatively effect Meta's current and future revenue. When this is combined with managements guidance for increased capital expenditures for 2022, is reason for pause for most institutional investors as well as other short term market participants.
At the time of writing Meta is trading at 164.0. We have already purchased our first block of shares and are looking for an opportunity to pick up more or adjust our cost basis down or both. We will also keep our eyes on the upcoming 13F filings to see if the Michael Burry's and Prem Watsa's of the world increase their Q1 positions.