Meta is a global leader in social media and digital advertising, powered by a massive user base, strong network effects, and advancements in AI. With investments in AI-powered assistants, open-source AI models, and the next generation of computing through Reality Labs, the company is positioning itself for long-term growth. However, regulatory scrutiny, intense competition, and shifting user engagement patterns present challenges. The question is: Should Meta be part of your portfolio?
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.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Meta. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I do not own any stocks in any of Meta's direct competitors either. Thus, I have no personal stake in Meta. If you want to purchase shares or fractional shares of Meta, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.
The Business
Meta is one of the world’s largest digital platforms, connecting over 3.1 billion people daily across its apps, including Facebook, Instagram, WhatsApp, and Messenger. The company generates the vast majority of its revenue from digital advertising, leveraging its massive user base and AI-driven ad targeting to help businesses reach consumers at scale. Meta’s Family of Apps segment remains highly profitable, delivering an operating margin of 54% in 2024, while its Reality Labs division invests in next-generation technologies, including virtual reality, as well as AI-powered wearable devices. Meta has built a strong moat through its unmatched network effects and deep integration into daily life. With billions of users engaging with its platforms for communication, entertainment, and commerce, switching to alternative services presents a high barrier. This entrenched user behavior reinforces Meta’s dominance, making it difficult for competitors to displace its ecosystem. The company’s vast data infrastructure and AI capabilities further enhance its ad platform, making it indispensable for marketers looking to maximize their return on investment. Beyond advertising, Meta is investing heavily in the future of digital interaction. The company’s Reality Labs segment develops next-generation computing platforms, including VR headsets, AR glasses, and AI-powered assistants like Meta AI. While these initiatives currently operate at a loss, they reflect Meta’s long-term vision of building an immersive digital ecosystem that could redefine how people work, socialize, and consume content. Meta’s brands, including Facebook, Instagram, and WhatsApp, are deeply embedded in global culture, reinforcing its market leadership.
Management
Mark Zuckerberg is the CEO, Chairman, and Founder of Meta, as well as its largest shareholder. A controversial figure in many ways, he is also undeniably a visionary leader. He launched Facebook at just 19 years old, and two decades later, it has grown into a multibillion-dollar enterprise, shaping the way billions of people connect online. While his tenure has been eventful, several highlights stand out. He was named Time Magazine’s Person of the Year, led Meta through the largest tech IPO of its time in 2012, and has consistently demonstrated a willingness to make bold, high-stakes investments. His strategic acquisitions of Instagram ($1 billion), Oculus ($2 billion), and WhatsApp ($19 billion) have played a crucial role in Meta’s long-term dominance. Beyond business, he has also committed to philanthropy through initiatives like the Chan Zuckerberg Initiative. Mark Zuckerberg has maintained a high approval rating as CEO, and I particularly value when a company is led by its founder. Founders tend to be deeply committed to long-term growth rather than short-term financial gains - something Mark Zuckerberg, with his controlling stake, has the freedom to prioritize. Looking at Meta’s performance under his leadership, it’s hard to argue against his effectiveness as CEO.
The Numbers
The first metric we’ll examine is Return on Invested Capital (ROIC). Ideally, we want to see ROIC exceed 10% annually and follow an upward trend. Meta went public in 2012 and, while its ROIC was acceptable in the early years, it truly began to accelerate from 2016 onward. Over the past seven years, Meta has delivered an ROIC above 20% in five of them—an encouraging sign of strong capital efficiency. Even in 2022, a particularly challenging year for the company, Meta still maintained an ROIC above the 10% threshold. The company then rebounded, increasing ROIC in both 2023 and 2024, with 2024 marking its second-highest level ever. Given Meta’s high-margin business model, I expect the company to sustain strong ROIC levels in the years ahead.
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 actual numbers and the year-over-year percentage growth. Meta consistently grew its equity every year until 2021, when the business was significantly impacted by the pandemic and a decline in advertising spending. Given these external factors, the slight drop in equity from 2020 to 2021 is not a major concern. Growth remained muted in 2022 but rebounded strongly, surpassing 10% year-over-year from 2023 onward - an encouraging trend.
Finally, we will analyze 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. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Until 2022, Meta was a textbook example of strong free cash flow growth, delivering consistent year-over-year increases. However, 2022 was a challenging year, marked by a significant decline in free cash flow. Fortunately, this appears to have been an anomaly, as Meta rebounded in 2023, achieving its highest free cash flow ever - only to surpass it again in 2024. This performance is particularly impressive given that 2024 was a record year for capital expenditures. Meta expects to ramp up spending even further in 2025, investing heavily in servers, data centers, and networking infrastructure, which management views as a strategic advantage for the future. As a result, a decline in free cash flow in 2025 would not be surprising. Although levered free cash flow has not yet returned to previous highs, it remains strong at nearly 33%, its second-highest level since 2017. Meanwhile, the free cash flow yield suggests that Meta is currently trading at a higher valuation than usual, though we will revisit valuation later in the analysis.
Debt
Another important factor to consider is the level of debt. It is crucial to assess whether a company's debt is manageable, meaning it can be repaid within three years based on earnings. We determine this by dividing total long-term debt by earnings. In Meta’s case, the company has just 0,46 years of earnings in debt, indicating that debt is not a concern for investors. In fact, Meta has never carried significant debt, making it unlikely to become an issue in the future.
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Risks
Regulations pose a significant risk to Meta, affecting multiple aspects of its business. The company relies heavily on collecting and analyzing user data to enhance ad targeting, but increasing regulatory scrutiny on data privacy threatens this core advantage. In the EU, the GDPR imposes strict data protection laws, with heavy fines for violations. In the U.S., the California Consumer Privacy Act and similar state laws require greater transparency and restrict data usage, potentially weakening Meta’s advertising capabilities. Additionally, countries such as China, India, and Turkey have enacted data localization laws, requiring companies to store user data domestically, which increases compliance costs and operational complexity. If Meta faces further restrictions on data transfers and processing, it could disrupt its advertising business, reduce targeting precision, and slow revenue growth. Regulators in the U.S. and EU are also scrutinizing Meta’s dominance in social media and digital advertising. The Federal Trade Commission has sued the company, alleging anti-competitive behavior related to its acquisitions of Instagram and WhatsApp. If successful, the lawsuit could force Meta to divest these businesses, significantly altering its competitive position. In the EU, the Digital Markets Act designates Meta as a "gatekeeper," imposing strict regulations on data usage and platform integration. This could limit the company’s ability to leverage its ecosystem for targeted advertising. Meanwhile, investigations in the UK, India, and Turkey may further restrict Meta’s expansion and cross-platform data integration. If regulators impose additional constraints on how Meta operates, integrates services, or acquires new businesses, it could hinder innovation, reduce profitability, and limit future growth. Regulatory fines and legal challenges have already cost Meta billions, and further penalties could be substantial. Notable past fines include a €1,2 billion GDPR penalty in 2023 for violating EU data transfer rules and a $5 billion FTC fine in 2019 for privacy violations related to Cambridge Analytica. Beyond direct fines, compliance with evolving regulations requires significant investment in legal teams, policy enforcement, and technical infrastructure, which could pressure profit margins.
Competition poses a significant risk to Meta across multiple areas of its business, including user engagement, advertising, and hardware. The company operates in a rapidly evolving industry driven by innovation, disruptive technologies, and shifting consumer preferences. Meta faces intense competition from platforms that offer alternative spaces for social connection, content sharing, and communication. Rivals such as TikTok, YouTube, and Snapchat continue to attract younger demographics, leading some users to reduce their engagement with Meta’s apps. This trend is concerning, as Meta’s business model relies on high levels of user engagement to sustain its advertising revenue. If users spend less time on its platforms, Meta’s ability to monetize through ads weakens. In digital advertising, Meta competes with platforms like Google, Amazon, and TikTok. Some competitors, particularly Google and Apple, have greater control over mobile ecosystems, allowing them to implement policies that restrict Meta’s ability to collect data for ad targeting. Apple’s iOS privacy changes, for example, have significantly impacted Meta’s ability to measure ad effectiveness, forcing the company to adapt its advertising model. If competitors continue to limit Meta’s access to data or if advertisers shift budgets to alternative platforms with better targeting capabilities, Meta’s ad revenue could come under further pressure. Competition is also intensifying in consumer hardware and virtual reality, where Meta is up against companies such as Apple, Microsoft, and Sony. The launch of Apple’s Vision Pro directly challenges Meta’s Quest headsets, and companies with larger hardware ecosystems may have an advantage in driving adoption. If Meta struggles to differentiate its products or gain widespread consumer traction, its long-term investments in Reality Labs may not generate the expected returns.
Failing to retain existing users or attract new ones poses a significant risk to Meta, as its business model relies on a large and highly engaged user base. The size of its active user base and the frequency of engagement across its platforms directly impact its ability to generate revenue, particularly through advertising. If users decrease their activity or leave the platform, ad impressions decline, reducing Meta’s financial performance. Meta has experienced fluctuations in user growth and engagement, particularly in markets where it has already reached high penetration. Broader economic and geopolitical factors also play a role. The COVID-19 pandemic caused swings in user activity, while government restrictions, such as the ban on Facebook and Instagram in Russia, led to declines in certain regions. Users are highly sensitive to the perceived value of Meta’s platforms. If they no longer find its services useful, reliable, or engaging, they may spend less time on them or leave altogether. Many social networking companies that once dominated the industry have seen their user bases erode, and Meta is not immune to a similar fate. Emerging platforms and shifts in digital consumption habits could lead users to migrate elsewhere. While Meta must continuously innovate to maintain engagement, product updates designed to enhance the user experience can sometimes have the opposite effect. Changes to content display, the frequency or prominence of ads, or efforts to create safer, age-appropriate environments could unintentionally drive users away. If key demographics disengage, Meta’s competitive position weakens, and the effectiveness of its ad platform diminishes. A decline in engagement creates a cascading effect. Fewer active users make Meta’s platforms less attractive to advertisers, leading to reduced ad revenue. This, in turn, limits the company’s ability to reinvest in innovation, potentially accelerating a downward cycle.
Reasons to invest
Meta’s investments in artificial intelligence represent a compelling reason to invest in the company, as AI is expected to play a transformative role in its products, infrastructure, and long-term monetization strategy. Unlike competitors that treat AI as a standalone business, Meta is embedding AI deeply into its ecosystem to enhance user engagement, advertising, and future computing platforms. One of Meta’s most significant AI initiatives is Meta AI, its personalized assistant, which already has more users than any other AI assistant. Mark Zuckerberg expects 2025 to be the year when a highly intelligent, personalized AI assistant reaches over a billion people, with Meta AI positioned to lead. AI assistants typically develop a durable long-term advantage once they reach massive scale, and Meta is differentiating itself by focusing on personalization. Unlike competitors that offer a single, uniform AI model, Meta AI adapts to each user’s context, interests, and personality, making it more relevant and engaging. If Meta successfully scales its AI assistant across its platforms, it could become an indispensable tool for billions of users, reinforcing its ecosystem and unlocking new monetization opportunities. Another major initiative is Llama, Meta’s open-source AI model. Unlike many AI models that are kept private by companies, Meta has made Llama available to developers and businesses to use, modify, and improve. With Llama 3, Meta aimed to make open-source AI just as powerful as closed, proprietary models. Now, with Llama 4, the company’s goal is to take the lead in AI development. By open-sourcing Llama, Meta encourages more companies and developers to adopt its model. The more people use and improve Llama, the more advanced and efficient it becomes, creating a network effect that strengthens Meta’s position in AI. If Llama 4 becomes the most widely used AI model, Meta could establish itself as a leader in AI research and innovation, while also benefiting from the broader adoption of its technology. Meta’s AI strategy follows a proven playbook—build a product, scale it to a billion users, then monetize it. This approach has worked successfully in the past, and Meta is applying the same methodology to AI. While AI will not be a major revenue driver in 2025, the groundwork being laid today could translate into significant business opportunities in the years ahead.
Meta’s Reality Labs division represents a long-term investment opportunity as the company positions itself at the forefront of the next generation of computing. While Reality Labs currently contributes just 1,3% of Meta’s revenue, management views it as a strategic investment that could redefine digital interaction in the coming decades. Meta’s recent success with Ray-Ban Meta AI glasses suggests that AI-powered smart glasses could achieve significant consumer adoption much sooner than expected. Initially, Meta believed smart glasses would only take off once they could display holograms and create an immersive sense of presence, but AI advancements have accelerated their potential market. The ability to see and hear what the user experiences allows AI assistants to provide real-time, context-aware support, making AI glasses a more intuitive and interactive platform than smartphones. Meta envisions smart glasses as the next major computing platform, much like how smartphones overtook desktops as the primary device for everyday computing. If AI-powered smart glasses follow the adoption curve of previous breakthrough consumer electronics and become a widely embraced product category, sales could eventually reach hundreds of millions, if not billions, of units over time. While the Metaverse remains in its early stages, Meta continues to build the foundation for what could become a trillion-dollar market. Morgan Stanley estimates the Metaverse could be an $8,3 trillion addressable market, and Meta remains the pioneer in the space. While profitability is still a long-term goal, likely in the 2030s, the company is steadily growing its Quest and Horizon user base. Meta’s Reality Labs is still operating at a loss, but it is focused on long-term technological leadership rather than immediate profitability. While AI-powered smart glasses could reach mass-market adoption sooner than expected, holographic AR glasses and a fully immersive Metaverse remain longer-term opportunities. Meta is making significant early investments to establish itself as the market leader, similar to how it scaled Facebook, Instagram, and WhatsApp before fully monetizing them. If AI glasses emerge as the next computing platform and the Metaverse evolves into a multi-trillion-dollar industry, Reality Labs could become one of Meta’s most important growth drivers in the future.
Meta’s increasing monetization efficiency is a strong reason to invest in the company, as it enhances revenue growth without relying solely on user expansion. The company is optimizing ad placements to improve relevance while maintaining user engagement. By fine-tuning when and where ads appear, Meta ensures they are shown at the most effective moments in a user’s feed. This not only enhances the user experience but also increases ad supply efficiency, allowing Meta to maximize revenue from its existing platforms. Beyond optimizing its current platforms, Meta is expanding monetization to previously unmonetized areas. Threads, which has grown to over 320 million monthly active users, is beginning to test ads. While the impact on revenue in 2025 is expected to be limited, the long-term potential is significant. If Threads continues its trajectory toward reaching a billion users, it could become a major revenue driver. Similarly, WhatsApp is gaining traction as a business messaging tool, creating additional opportunities for advertising and commerce. Meta is also improving its ad targeting and effectiveness through advancements in artificial intelligence. The company recently introduced Andromeda, a machine learning system developed in partnership with Nvidia. This system enables a 10.000-fold increase in the complexity of ad ranking models, significantly improving Meta’s ability to match users with the most relevant ads. Early results show an 8% increase in ad quality, leading to better ad performance and higher advertiser returns. By delivering more relevant ads, Meta increases engagement while making its platform more valuable to advertisers. Another key area of monetization growth is the automation of advertising campaigns through Advantage+. This AI-driven system helps advertisers optimize their campaigns with minimal manual effort. Adoption of Advantage+ shopping campaigns has grown rapidly, reaching a $20 billion annual revenue run rate with 70% year-over-year growth. With its focus on ad optimization, AI-driven personalization, and automation, Meta is improving the efficiency of its advertising business while expanding monetization across new platforms. These efforts position the company for sustained revenue growth, making its advertising ecosystem more valuable for both users and marketers.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 23,86, which is from the year 2024. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 21,3% in the next five years, but 15% is the highest I use. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Meta's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $715,80. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Meta at a price of $357,90 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 78.422, and capital expenditures were 28.882. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 20.217 in our calculations. The tax provision was 8.303. We have 2.534 outstanding shares. Hence, the calculation will be as follows: (78.422 – 20.217 + 8.303) / 2.534 x 10 = $262,46 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Meta's free cash flow per share at $21,42 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $338,13.
Conclusion
Meta is a great company with multiple competitive advantages and excellent management. Since 2016, it has consistently achieved a high ROIC, reaching its highest level ever in 2024. Free cash flow also hit a record high, and while the levered free cash flow margin hasn’t returned to prior peaks, it remains strong at nearly 33%. Regulations pose a significant risk to Meta by restricting its ability to collect and process user data, which is central to its advertising business. Increasing privacy laws in the U.S. and EU, data localization requirements in multiple countries, and antitrust scrutiny threaten Meta’s ad targeting capabilities and operational efficiency. Legal challenges, potential platform restrictions, and costly compliance measures could pressure profit margins and limit future growth. Competition is another key risk, as Meta faces intense challenges in user engagement, digital advertising, and hardware. Rivals like TikTok, YouTube, and Snapchat are attracting younger users, potentially reducing engagement and weakening Meta’s ad revenue. In digital advertising, Apple and Google’s control over mobile ecosystems limits Meta’s data access, affecting its targeting capabilities. Meanwhile, competition in virtual reality and consumer hardware from companies like Apple and Microsoft could slow adoption and profitability for Meta’s Reality Labs. Failing to retain existing users or attract new ones is another major risk, as Meta depends on a large and engaged user base to sustain ad revenue. Declining user activity or migration to competing platforms could reduce ad impressions, weaken Meta’s competitive position, and create a downward cycle that limits future growth and innovation. Despite these risks, Meta’s deep integration of AI enhances user engagement, advertising, and future computing platforms, positioning it as a leader in AI. With Meta AI expected to reach over a billion users and Llama 4 driving open-source AI adoption, the company is laying the foundation for long-term monetization and technological leadership. Reality Labs presents a long-term investment opportunity, as Meta pioneers AI-powered smart glasses and builds the foundation for the Metaverse. With early success in AI-driven smart glasses and the potential for the Metaverse to become a multi-trillion-dollar market, Reality Labs could become a major growth driver. Meta is also improving monetization efficiency by optimizing ad placements, leveraging AI for better targeting, and expanding monetization to platforms like Threads and WhatsApp. AI-driven advancements like Andromeda and Advantage+ are automating ad campaigns and improving relevance, maximizing ad performance while creating new revenue streams. I will buy shares below $500, as this price provides a discount to intrinsic value across all three of my calculations, making it a compelling long-term investment.
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