As chronicled by John Templeton’s famous bet in the Great Depression, he put in $100 on all the stocks listed in the stock exchange, which was 104 stocks that cost him $10,000 dollars (Equivalent to $185,000 today).
His bet was on the basis that the market has reached maximum pessimism. His good foresight has proven prescient and it netted him close to a 5 times returns when he eventually liquidated all of his positions years later.
The point we are trying to highlight is that the market tends to overreact and therefore, we do not feel Meta have reached the optimal entry-level despite the huge decline in recent times. The bearish trend might just have started and it would need some time to play out.
Let’s first revisit some main points that led to Meta’s plunge:
- The fall in Daily Average Users (DAUs) for Facebook- an important barometer of growth.
- Apple Privacy Policy would cost Meta 10 Billion a Year
- 10 Billion a year to be spent on research and development for MetaVerse
- Credible Competitor in Douyin (TikTok)
Source: Meta Corporate Presentation
1) The drop in daily average users for Facebook would come as a surprise to most investors as they have only been on a steady increment through the years. The monthly average users and average revenue per user are still seeing slight increments.
Perhaps, investors are worried that the drop in DAUs could be the start of the decline of Facebook. Their family of apps are still seeing DAUs growth.
With Facebook’s latest count of monthly active users at 2.9 billion and with the total world population at 8 billion, there could be growth stagnation as they are trying to grow from a huge base.
So we hope the user base would stabilise and not see a more prominent drop in the quarters ahead.
2) The Apple Privacy Policy have hit Facebook that is an estimated decline of 10 billion dollars a year in revenue. The inability to track users using their app would lead to less desired advert placements.
From what we have seen from other commentators, the effect of Facebook ads has been less effective which is expected. This would lead to advertisers looking at alternatives such as google ads.
Facebook’s response to this would be they are building up their ads infrastructure so they can continue to grow and deliver high-quality personalized ads.
We are not sure how they are going to get past Apple’s privacy firewall so this would be an area that they might have less control of.
On top of that, Android is also looking into implementing privacy controls of its own.
3) The Metaverse would be their trump card for the future if it succeeds. They are expected to spend 10 billion dollars a year on this endeavour.
For a start, they would be the owner of the infrastructure just like Andriod and Apple IOS and would not be held hostage such as the recent Apple’s IOS changes- where they are just an app in the ecosystem.
It is a place where we could hold virtual meetings and conduct training for dangerous job tasks such as those in the oil rig industry.
More importantly, it could be a world where we can escape given the real world might be less forgiving and stressful.
So our entertainment time could be spent in this virtual world with our own avatar. We will have our own property in the poshest virtual community.
We could also show our prized NFTs art pieces or accessories to give more identity to the persona.
This is really a work in progress and a lot of imagination would be needed to see how this will pan out.
One thing is for certain, Zuckerburg wants to make this a reality and success from the name change and the funding commitment so far.
4) Meta is facing a formidable challenge by TikTok as Zukerberg has mentioned them during his corporate presentation.
However, Meta has been quick to respond to threats as could be seen from the rollout of Instagram Reels and Facebook Videos.
The unique point about Facebook is to help you keep in touch with your family and friends. Also, it is a good aggregator for news and you could be joining interest groups and communities.
All these features have so far not been replicated by TikTok.
As of now, TikTok is good for humour and to a certain extent, education and useful information
Thus, with the infusion of the Metaverse to their huge users base and family of apps, Meta has a strong moat and users won’t just abandon Meta’s suite of apps, as there are no real competitors with their reach and ecosystem at this juncture.
Financial Ratios
| Stock/ Price | Price Earnings Ratio | Price to Free Cash Flow | Price to Book | Net Cash | Return On Investment | Current Ratio | Free Cash Flow | Market Cap |
| Meta/ 195 | 14.6 | 14 | 4.44 | 47 billion | 27% | 3.15 | 39 billion | 550 billion |
Source: Reuters
From the numbers, Facebook is trading at a reasonable valuation given their return on investment and cash flow generating prowess. PE of 15x for a good quality company would entice even Warren Buffet.
They are in a net cash position with 47 billion dollars. So all the planned investment into Metaverse would not affect their credit standing as they have a strong balance sheet.
Nonetheless, the market is worried about growth plateauing and even could see the start of the decline of their business. There are currently 2.9 billion monthly active users for Facebook versus a world population of 8 billion.
As highlighted earlier, Meta is definitely not resting on its laurels and is very proactive in reacting to new competition and concepts. Their venture into Metaverse would be the next move to cement themselves as the King of Social Media- they are serious about it from the estimated amount to be ploughed into the venture.
Moreover, apart from a slight decline in their daily active users for Facebook, their family of apps (Facebook, Instagram, Whatsapp and Facebook Messenger) are still seeing growth.
Through the latest guidance, growth of 20% and above could be put on hold as their Q1 guidance was for revenue growth of just 3%-11% year over year. This shows they could be in a transitional and consolidation stage till the next pivot of growth comes in with their new initiatives. The way they navigate Apple and Android IOS privacy policy to put in high conversion ads would be critical for future growth.
Chartist Point of View
Source: Moomoo
Looking at the charts, the going is tough as the line of least resistance is still pointing downwards. There will definitely be bounces along the way.
Our take is any good rebound is a choice entry for nimble short traders– perhaps 250 to 260 region if the decent rebound materialise. We doubt maximum pessimism has been triggered yet and so there could be still further downside in the months ahead.Â
The rationale for our take is because many are still pounding on the table to say Meta is a good buy, value play and etc. At maximum pessimism, everyone is afraid of buying it.
Adding on, easy money is now gone with likely no QE in the near to mid-term. With inflation reaching 7% in the US, the odds of printing money like no tomorrow would take a leap of faith that the credibility of the US credit would not be affected. Hence, it would require serious deliberations from policymakers.
For a bear trend to play out, it would likely flow by the Elliott wave counts. We are possibly in wave 3 now with wave 5 being the last wave and where maximum pessimism is likely to happen.
Some possible bottoming range from the charts would be 140-150 followed by 120-130 levels. Markets tend to overshoot so this would merely act as a guideline.Â
Summing Up
Meta Platforms is looking attractive after the recent sharp fall. It has a quality business model with high returns on capital and is a cash-generating machine.Â
With intense competition from a competitor like Tik Tok, it has shown the first decline in daily active users for the latest quarter. Coupled with the Apple and Android IOS privacy policy, it has affected their ads revenue to the tune of 10 billion dollars a year
On top of that, it is intending to spend 10 billion a year on making metaverse a reality. Given they have 117 billion of revenue, 10 billion would be 8.5% of the total revenue. For innovative companies, research and development costs of slightly 10% and above would be reasonable to keep their edge.
The revenue and profits of Meta would likely still be sustainable in the near to mid-term while they reinvent themselves and not rest on their laurels.
Valuation of Meta is reasonable at current valuation with a PE of 15. However, markets tend to swing to the extreme at both ends. We feel we have not seen maximum pessimism yet and there could be further downside ahead.
Disclaimer:
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
