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  • Glenn

Meta: A Free Cash Flow Machine

Opdateret: 27. jan.

There are many opinions on Meta as a company, and I understand that it isn't an investment for everyone. However, Meta is still generating a significant amount of cash, which we will discuss further in this analysis. Is it time to buy Meta? I will try to give you the answer in this analysis.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I should mention that at the time of writing this, I do own shares in Meta. It is currently 3,14 % of my portfolio that you can copy. If you are interested in copying me or viewing my portfolio, you can find instructions on how to do so here. Despite owning Meta, I will keep this analysis unbiased. If you want to purchase shares or fractional shares in Meta, you can do so through eToro. eToro is very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started

I believe that most people are aware that Meta is a social media and social networking service. Besides their flagship Facebook, they also own several other companies, including Instagram (a photo and video-sharing app), WhatsApp (a mobile messenger service), Oculus VR (a virtual reality technology company), Onavo (a mobile web analytics company),and Beluga (a messaging service), among others. Meta is making its profit through advertising and is one of the largest advertising companies in the world. I do not want to go into too much detail about the company, as it is well known. However, it is important to note that Meta has two business segments. Their highly profitable "Family of Apps" that includes Facebook, Instagram, and their other apps, as well as "Reality Labs" with Oculus and all Metaverse-relatedbusinesses. Investigating moats, I believe that Meta has two moats. The first one is a brand moat, as consumers place greater trust in the brand, particularly Facebook, Instagram, and WhatsApp, which are widely used globally. This directly leads us to the second moat, which is the switching moat. The apps are such a big part of people's lives that it is hardly worth switching if there were to be competitors at the same scale.

Their CEO is Mark Zuckerberg, who is also the founder of Meta. Besides being the CEO, Chairman, and Founder of Meta, he is also the largest shareholder. Mark Zuckerberg is, in many ways, a controversial figure, and there are numerous opinions about him. However, one thing that cannot be disputed is that he possesses a brilliant mind. He founded Facebook when he was just 19 years old, and now, 15 years later, it is a multibillion-dollar business. I do not want to go through his entire tenure as a CEO, but some of the highlights are that he has been named Person of the Year by Time Magazine, been responsible for the biggest tech IPO in history at the time (2012), he is committed to philanthropic causes, and he is not afraid to spend money on acquisitions (Instagram $1 billion, Oculus $2 billion, and WhatsApp $19 billion). He does have a high approval rating as a CEO, and I always appreciate it when a founder serves as the CEO, as they are typically more dedicated to growing their business than to filling their wallet (not that Mark Zuckerberg needs to worry about that). If you look at the results of Meta, I believe that you can certainly determine that Mark Zuckerberg is a great CEO for Meta.

I believe that Meta not only has one, but two moats. We really like the management as well. Now let us investigate the numbers to see if Meta does live up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.

The first number we will look into is the return on invested capital, also known as ROIC. We would like to see the ROIC be above 10% in each year and increasing. Meta made their IPO in 2012, and while they delivered an acceptable ROIC in the first couple of years, it really took off since 2017. Meta has delivered a return on invested capital (ROIC) of more than 20% in 4 out of the last 5 years, which is encouraging. 2022 was a very challenging year for Meta in many ways, but they still managed to deliver a high ROIC above the 10% threshold that I would like to see. As a Meta investor, I am happy to see numbers like these.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actualnumbers and the percentage growth year over year. Meta managed to grow its equity every year until 2021, which was still highly affected by the pandemic and reduced advertising spending. Thus, the slight decline in equity from 2020 to 2021 is not something I worry about. Equity grew slightly in 2022, which is encouraging, despite still being below the 2020 level.

Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Up until 2022, Meta was essentially a textbook example of desirable growth in free cash flow, with year-over-year increases. 2022 was a very challenging year for Meta, as evidenced by their free cash flow, which decreased significantly. Hopefully, 2022 is an outlier and Meta will return to growth in their free cash flow. Looking at the fourth quarter of 2022, it is evident that Meta delivered a higher free cash flow during that period compared to the preceding two quarters. Hopefully, this is an indicator that Meta will return to generating a stable free cash flow in the future.

Another important factor to consider is the level of debt. It is crucial to determine whether a business has a manageabledebt that can be repaid within a three-year period. We do this by dividing the total long-term debt by earnings. Looking at Meta's debt, we can see that Meta has 0,43 years of debt. It is, of course, a very good thing and yet another reason to be positive about investing in Meta.

Like with all other investments, there are some risks when investing in Meta. One risk is regulations. There can be regulations regarding data collection, as well as anti-trust and anti-monopoly regulations. In the latest earnings call, when asked about data collection management, the company mentioned that "the regulatory environment is a real challenge for our industry." They also stated that they are actively working on technologies that require less data. However, they acknowledged that this is a significantly challenging time for the industry. Regarding antitrust/anti-monopoly regulations, we still have to wait for the outcome of the 499-page report from the antitrust subcommittee of the House Judiciary Committee. Furthermore, Lina Khan has been appointed as the Chairperson of the Federal Trade Commission, and she is renowned for being a staunch opponent of big tech. Finally, we have seen a lot of regulations in China. And while these do not directly affect Meta, the President of Tencent has recently stated that he believes we will see internet regulations everywhere. It just started in China. Apple's App Tracking Transparency Changes. The change in iOS means that developers are now required to ask users forpermission before they can track their data. As a result, only 25% of the users allowed Meta to track their data. As a result, Meta suffered a revenue loss of approximately $10 billion in 2022 alone. And during their fourth quarter 2022 earnings call, management mentioned that App Tracking Transparency continues to be a significant obstacle affectingtheir revenue. However, management also mentioned that Meta is making progress in mitigating the impact. It is possible that Google will implement similar measures on Android. Competition. TikTok is still growing and may be the strongest competitor that Meta has ever encountered, despite being banned in the United States. Furthermore, we recently saw Snapchat guide for a slowdown in the digital advertisingindustry. One reason is that the world is reopening after the pandemic, which means that offline advertising is now consuming a larger portion of advertising budgets. Furthermore, we might see an economic slowdown around the world, which could result in a reduced marketing budget for companies. This could potentially harm Meta even more.

It isn't all bad though, and there is plenty of potential for Meta moving forward. In the latest earnings call, management mentioned that they have three main investment priorities that they expect will drive growth. The first is Reels. While Meta has managed to monetize Reels, the current monetization is much lower than that of Feed. Management wants to improve their ability to monetize Reels, and it appears that they are heading in the right direction. In fact, their monetization efficiency on Reels at Facebook has doubled in the last six months of 2022. Reels are growing at a fast pace, as they more than doubled in the last year. Management believes that they have the playbook for leveraging the type of consumer engagement that reels have and integrating ads into the experience. The second is Ads. Ads are closely intertwined with Reels as a future growth story. To expand their ads business, they will develop the most advanced AI models and infrastructure in the industry, which is expected to yield higher returns for advertisers. Management mentioned that previously, they could only show posts from friends and businesses that the users followed. As a result, they were only able to display a few thousand posts per day to the users. Now, with AI, there are millions of posts a day that they could potentially show to a user. They also mentioned that in the near term, ad revenue will decrease due to lower monetization from Reels. However, the same thing happened in 2012 when they transitionedfrom desktop feed to mobile feed, and again in 2018 when they shifted from mobile feed to stories. And both times, they emerged stronger. In short, Meta aims to expand its ads business by increasing video monetization, refining their datamodels to achieve more with less data, and leveraging AI to enhance the ad infrastructure. The third is the Metaverse. The monetization of the Metaverse is not anywhere near. Management believes that we must wait until the 2030s before we see any monetization from the Metaverse. It is still difficult to predict what the Metaverse will become. According to Morgan Stanley, they believe that the Metaverse has the potential to be an $8,3 trillion addressable market. In other words, it could be enormous, and Meta is the pioneer. Management also sounded rather confident regarding the Metaverse in the latest earnings call. They stated, "We expect to be meaningfully better atmonetization than others in this space, and we think that should be a sustainable advantage to our platforms as they develop. "

All right, we have gone through the numbers, potential, and risk regarding Microsoft, and now it is time for us to calculate a price for Microsoft. To calculate the price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website. I don't want to go through the entire calculation here.I use an EPS of 8,59, which is the one from 2022. I use an estimated future EPS growth rate of 15% (Finbox expects EPS to grow by 15,7 % over the next five years), an estimated future PE of 23 (in this case, we multiply the predicted growth rate by two, as this is lower than the historical highest P/E), and we already have the minimum acceptable return rate of 15%. Doing the calculations, we have determined the sticker price (also known as fair value or intrinsic value) of $257,70. We want to have a margin of safety of 50%, we will divide this value by 2, resulting in a desired purchase price of $128,85 (or lower, of course) if we use the margin of safety price.

Our second method for calculating a purchase price is the Ten Cap price, which is also explained in "MY STRATEGY".To do so, we need some numbers from their financials. Keep in mind that all numbers are in millions. The operating cash flow last year was 50.475. The capital expenditures were 31.431. I tried to look through their annual report to see how much of the capital expenditures were used for maintenance. I couldn't find it, so as a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 22.002 in our further calculations. The tax provision was 5.619. We have 2.614 outstanding shares. Hence, the calculation will be like this: (50.475 - 22.002 + 5.619) / 2.614 x 10 = $130,42 in Ten Cap price

The final calculation is the Payback Time. I also described in "MY STRATEGY". With Meta's Free Cash Flow Per Share at 7,26 and a growth rate of 15%, if you want to recoup your purchase in 8 years, the Payback Time price is $114,61.

Meta has multiple strong moats and excellent management. All their numbers look great, and they are delivering a solidchunk of free cash flow year after year. They are currently facing some headwinds, especially with the privacy changes in iOS. It is something they will be able to navigate moving forward. Macroeconomics could also result in businesses spending less money on advertising, which is obviously detrimental to an advertising business. There are also a lot of uncertainties regarding the Metaverse, but if management is right in their predictions about the Metaverse, it could be huge for the company. However, right now there is no way to know how it will turn out. Metahas has 2,9 billion people using one of their apps daily and at least 3,6 billion people using one on a monthly basis. It is huge, and Meta won't go away anytime soon. And remember that I based my calculations on a poor year for Meta. I already own Meta and my position may grow bigger over time. I feel very comfortable buying Meta below the Ten Cap Price of $130,42.

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