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Facebook, Whatsapp, Instagram... hot or not?

Feb. 29, 2024
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FinMeUp
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FinMeUp

Meta Platforms Inc [NASDAQ: META] stock pick.

 

Meta Platforms Inc (formerly known as Facebook) is an American multinational technology conglomerate. As the largest social media platform in the world, its mission is to give people the power to build communities and bring the world closer together. 

3.6 billion people across the world make use of Metas various platforms, exchanging roughly 140 billion messages every day. The world is indeed smaller than ever before.


Business

The company operates in two segments: Family of Apps and Reality Labs. 

The Family of Apps segment's products include Facebook (2.93B users), Whatsapp (2.0B users), Instagram (1.5B users), and Messenger (1.0B users) Below are the most popular social networks in the world, ranked by the number of monthly active users.

PLATFORM        ACTIVE USERS

Facebook            2.9B

YouTube               2.5B

WhatsApp           2.0B

Instagram            1.5B

WeChat                 1.3B

TikTok                    1.0B

Messenger           1.0B

Douyin                   600m

QQ                         580m

Sina Weibo           570m

Kuaishou                570m

Snapchat              560m

Telegram              550m

Pinterest                450m

Twitter                   435m

Reddit                    430m

Quora                     300m

 

The Reality Labs segment provides augmented and virtual reality-related products comprising virtual reality hardware, software, and content that help people feel connected, anytime, and anywhere. Whilst Meta currently owns most of the worlds most popular social media platforms, it is also attempting to be the leading player in the virtual reality realm, also known as the Metaverse

 

Business Model

Meta generated revenues worth $117.93 billion in 2021. Advertisements accounted for 96.9% of revenues. Marketers buy ads that can appear on multiple platforms including Meta, Instagram, Messenger and third-party applications and websites.

 

Technical Analysis

[Refer to figure 3]

Market structure: Metas share price was in an upward trend from early 2019 to mid-Sep 2021. The share price started to decrease from its highs of $385 per share down to roughly $300 per share, before freefalling all the way to its current levels of $160 per share. 

Current levels: There are levels that we can use as support: $125 as established in January 2019, and $150, as established in March 2020. Looking at the bigger picture, these levels are not far from being retested. 

Momentum indicators: On the weekly time frame, the RSI has been ranging in oversold territory since the freefall in February. There is, however, something significant brewing in the background: The famous RSI divergence (as indicated by the grey trendlines on the share price graph and RSI). 

RSI divergence happens when the share price and the RSI moves in opposite directions. As things stand, Metas share price is decreasing, whilst the RSI is increasing. This normally signals a reversal in the current trend, which means that we could be seeing some upside for the share price in the near future.

 

Key Financials

Meta Platforms' growth is robust at a five-year revenue compound annual growth rate (CAGR) of 31.63%, supporting the argument that it is still a secular growth stock despite its maturity. Revenue growth and net income did however decline in Q1 2022, causing the share price to take a hefty blow.

Debt levels are low, cash levels are high. The debt and interest coverage ratios are more than sufficient. Overall, the financials look strong. 

So why the sudden decline in share price? What is the market reacting to and is it perhaps an overreaction?

 

Why the sharp fall in share price?

Q1 2022 revenue and user growth declined significantly. This is primarily due to the economic slowdown, which negatively affects ad spending by corporates.

Apples iOS changes have made ad targeting difficult, which, in turn, has increased the cost of driving outcomes. 

The company's excessive spending on the Metaverse has many investors worried due to uncertainty regarding the segment's financial feasibility.

Increasing competition in the social media and advertising spaces from the likes of Google, Amazon, TikTok and more. 

 

Reasons to buy

Rapid adoption of WhatsApp Business by small and mid-sized businesses is noteworthy.

AR/VR technology is fast emerging as a lucrative business opportunity. Meta is investing heavily in this industry. According to reports, the company plans to spend $3 billion in the next 10 years on VR.

First movers advantage: Meta has pioneered the concept of social networking. The company has a massive subscriber base and takes full advantage of the network effect. 

Still growing: As developed regions mature, Meta has taken measures to drive penetration in emerging markets of Southeast Asia, Latin America, and Africa. Of all places, India deserves a special mention in terms of user growth. The worlds second largest populated country offers tremendous potential for the company. 

Reels has been a huge performer on Instagram. Companies do not yet advertise via the reel format, but once Meta figures this out, it can lead to significant ad revenues.

One of the cheapest tech stocks in the US, trading at a current PE of 12.

 

Reasons to sell

Competition: In the advertising business, Meta faces tough competition from Google, Twitter, Amazon and Snapchat. Meta also faces significant competition from the likes of Apple (messaging), YouTube (advertising and video), Bytedance (social media) and Tencent (messaging and social media), and especially TikTok (social media) in recent years.

Legal woes: As Meta hosts a huge amount of personal data, it has been under constant scrutiny from privacy groups and federal agencies. This huge database is its primary asset for attracting advertisers. As a result, the company has been criticized for allegedly selling personal data to advertisers in order to boost its top line.

Metaverse: It might take many years before we see adoption of VR and the metaverse. Meta is burning a lot of cash on this prospect. Should it fail, it will be a massive blow to the company.

 

Final consensus

In our opinion, Meta Platforms remain well-positioned to benefit from the evolution of social commerce, commercial aspects, and future monetization potential of the Metaverse.

Though we could have a short-term slowdown in advertising revenue, we dont see a perpetual slowdown that would justify a 12 PE for this type of stock. 

FinMeUp is taking a position in Meta. We will reconsider our position when the interim set of financials is released.

 

Just a friendly reminder - This is not financial advice. Always do your own research before taking a position. Content is for informational and educational purposes only.

 


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