The market has not been kind to Meta investors in the last 2 weeks. The stock is down ~35% and is trading around $220 at 600B market cap and PE of ~16. The goal of this article is to point why the market is wrong in understanding Meta and evaluating its future prospects.
Main reasons for the selloff
- Drop in FB DAU for the first time
- 10B loss from IDFA - Apple's privacy change
- Tiktok's competition
There are two parts to the analysis
- SOTP valuation
- Facebook app's existential crisis (Tiktok, Apple and DAU drop)
Meta SOTP
- Current Valuation - $600B
- Cash and Equivalents - $48B
- Equity investments - $6.7B (Reliance Jio, Meesho, etc)
- Whatsapp is the world's largest global messaging app with over 2B users pre-pandemic
- Whatsapp business was one of the top 20 downloaded business apps for 2021
- Whatsapp launched payments in India and Brazil
- Whatsapp has started shops/catalog integrations which is used by SMBs in India
- Using $50 per user, we get a 100B valuation (Facebook paid around 35$ per user at the time of acquisition)
- This is discounting any pandemic growth
- Instagram passed 2B users in Dec 2021
- According to e-Marketer, Instagram has 50% revenue share. Statista has a 40% number. Let us use a discounted 35% number. This is the fast growing part of the business.
- Total revenue for 2021 was 117B and lets assume Instagram share was 40B (~35%)
- Using PE of 25 and 40% profits(16B), we get an Instagram multiple of 400B
- At this point, using cash + instagram + whatsapp we are already at ~555B
- Facebook + Messenger + Occulus is trading at a total of 50B which means market has effectively killed and burried the Facebook app. Market is considering Facebook the next orkut
- If Meta were to break the company tomorrow into 4 divisions : Facebook, Whatsapp, Instagram, Oculus and give Whatsapp and Occulus 24B cash each and give 0$ to Facebook and Instagram (just because they are cash machines), Meta stock could easily double tomorrow.
Valuing Facebook app
- The Facebook app is no longer an app to just find friends. It is like Facebook's Amazon prime subscription - equivalent to Microsoft's distribution. Facebook provides additional categories like marketplace, groups, videos which just makes the value of the Facebook account more and reduces churn and increases retention and engagement
- Facebook blue app now has 1.929B DAU which was down 1M QoQ, MAUs are still up QoQ.
- There can be a variety of reasons - covid reopening play, huge market penetration, saturating developing country growth, etc
- However, Facebook does not need to grow users to keep growing revenue/profits. ARPU can continue to grow as international markets are not as heavily monetized as US markets.
- Facebook does not have terminal risk. It is a digital utility today. Facebook has surfaces - which are today's utilities. Here are few key initiatives that remove terminal risk
- Facebook marketplace
- Facebook marketplace is the second largest marketplace in terms of MAUs behind only Amazon
- Facebook expands marketplace to Subsaharan african 37 countries . This also shows how easy it is for facebook to get into new categories.
- Facebook watch
- As of Sept 2020, more FB Watch has more than 1.25B MAUs
- Facebook is also building Watch as a music destination
- T-series, India's popular music label has 60M+ followers on Facebook
- Facebook Dating
- Facebook payments
- Besides whatsapp payments, Facebook is also building payment capabilities in messenger
- Facebook unveils split payments in messenger
- Payment capabilities will help users complete transactions in the app on marketplace and shops
- These are just to name a few, then there is Gaming, Groups, Shops
- This will help with 1st party data, mitigate IDFA risk, help grow the moat and remove terminal risk
- All these products within the Facebook app are not just discretionary businesses, they are utility businesses people all over the world use to organize themselves, organize information and buy/sell services/goods.
- Given a business of this caliber is trading for effectively free along with Instagram and Whatsapp, seems like the screaming BUY. This makes it look like Apple of 2016.
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