Meta Platforms (NASDAQ:META)
In a year, Meta Platforms (NASDAQ:META) has more than doubled from its lows and is trading at a premium of over 50% to its 52-week highs. As of right present, the market value of the firm is close to $500 billion. Even with a concentration on the metaverse and new privacy regulations, the system has fundamental problems. This will lead to the company’s underachievement.
Profits from Meta-Platforms
The fact that Meta Platforms still making money despite the uncertainty surrounding the company is reassuring.
With decent growth in the Rest of the World sector and remarkable resilience in the US & Canada core segments, the firm earned solid revenue in 4Q 2022, despite a YoY dip. Nonetheless, it was the third consecutive quarter in which the firm failed to increase year over year, which is a significant finding in and of itself.
A possible indicator of clients’ gradual withdrawal. Customers in the advertising industry are only willing to move once alternatives have been clearly established. The server CPU market was progressively sucked dry by AMD while Intel struggled to compete.
Costs of Meta-Platforms
Nevertheless, costs have soared with little prospect of slowing for the corporation.
Fourth-quarter 2020 had expenditures at 56% of revenue, whereas the 4th-quarter 2022 saw expenses at 80% of revenue. That’s a big jump, largely attributable to the company’s marketing and sales, which increased dramatically in the first few months of 2022, and general costs. Revenue growth has leveled (1Q 2023 projections align with 1Q 2022 expectations). Thus we expect this to stay the same.
In 2022, the business spent close to $88 billion. We estimate that the corporation will spend $92 billion in 2023, up around 5% year-over-year. Continued heavy investment in research and development into the metaverse drives the company’s costs. The company’s large capital expenditures have continued unabated.
Active Users of Meta Platforms
Due to the expansion of its app family, META stock has been a strong performer for the company.
4Q 2022 active users grew by 0.1% QoQ, keeping with the company’s historical quarterly growth. Since YE 2020, when the epidemic began, the firm has not had any significant growth. Amazingly, the firm has sustained even slow growth while operating in a competitive field with many other platforms.
Meta Platforms FCF
Due to the company’s size, however, making a profit is no longer a priority. Cash flow must be in the tens of billions per year for the market price to be reasonable.
We estimate that the corporation needs a yearly free cash flow of around $35 billion to sustain the current value. Half of this amount, or $18.5 billion, was produced in 2022 as free cash flow for the corporation. Its Free Cash Flow (FCF) was $35 billion that year. It was enough cash flow, but the company’s 50% year-over-year fall in FCF makes it evident that its current value needs to be revised.
Whether or if the firm can produce sufficient cash flow from its core business to warrant its value remains an open issue. Whether or not the corporation can achieve that at the present moment is up to question, given the enormous amounts of money being poured into initiatives that may or may not succeed.
Challenges of Meta-Platforms
Meta Platforms has to fix several fundamental issues before its price can be justified.
In the first place, there is the forthrightness of commercials. Apple’s privacy upgrades have already cost the business a significant amount of its advertising clout with its consumers. Amazon has been eating Facebook and Google’s lunch by revealing what consumers want to purchase. The advertising industry will continue to divide as a result of these issues.
The company’s new privacy policies are included in this. Success in reaching consumers likely to make a purchase determines an advertiser’s financial stability and, by extension, their willingness to pay for advertising space. It may get more challenging if Apple, one of Facebook’s most important user sources, maintains its emphasis on privacy.
Apple has nothing to gain and everything to lose by aiding Facebook in its endeavors.
Metaverse flopverse is the last term. Meta Platforms thinks the metaverse is the future of technology, as seen by its decision to invest tens of billions of dollars towards establishing as much. It took these choices without a proof (which it still needs) that the metaverse would generate enough revenue to warrant its price.
It has severely impacted the company’s FCF and it hasn’t shown any signs of wanting to rectify the problem.
Issues with the Thesis
The fact that Facebook’s primary business generates so much wealth is the biggest threat to our theory. If we use the current market valuation for the firm, we find that its FCF in 2021 is in the double digits. The corporation could swiftly create huge returns for its shareholders if it reduced its metaverse losses and refocused on its primary business.
Conclusion
After its financial low point, Meta Platforms has made a remarkable comeback. The company’s market valuation has rebounded to about $500 billion, a long way from its all-time high of over $1 trillion. The company’s rebound is more like a dead-cat bounce.
The company’s free cash flow (FCF) is still too low to support its current market price. It still has major issues due to Apple’s privacy changes and its ongoing massive metaverse costs. This weighed heavily on the organization’s profits and costs, reducing its free cash flow. The best course of action is to hold off on investing in Meta Platforms for the time being.
Featured Image: Freepik @ hammadalikhn
