Is Meta Platforms (Facebook) a buy?
An undervalued company with a strong business model and revenue
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Meta Platforms (Facebook) is down more than 50% year-to-date. The stock is currently selling at 2017 prices and the revenue is still strong.
Is Meta a buy at current prices?
Business Model
Meta is basically an online advertisement company within a huge social network. The business model is quite simple: a huge social media network with billions of users where Meta sells online advertisements.
The number of users of Meta’s platforms (Facebook, WhatsApp, Messenger and Instagram) is stunning: 3.6 billion people use their platforms.
The monetisation potential of such an extensive social network is huge. And the online advertising business is here to stay. No one uses magazines and newspapers to promote his business anymore. We all use social media and will use it more and more.
It is a highly efficient business model that allowed Meta to maintain operating margins above 40% on average for the last 10 years. That means that from every $100 dollar Meta sells, they keep $40 for themselves. That is impressive, to say the least.
The company is currently working on the metaverse, which future and profitability are still unclear, spending more than $10 billion each year to create it. If the metaverse will succeed or not is a question we cannot answer yet, but it is worth mentioning that Meta has a high chance of success — and a successful metaverse would make the company unbelievably profitable.
However, even without the metaverse, Meta is a great company with a strong business model —online advertisement— that won’t become unprofitable anytime soon.
Meta’s products are so entrenched in our society that the business cannot go broke —they don’t even have any debt, which makes a potential bankruptcy almost impossible. For that to happen, we should all stop using Facebook, WhatsApp, Messenger and Instagram, and it is not likely to happen.
Management Team
Mark Zuckerberg, founder and CEO, has proved himself as an excellent capital allocator and manager.
With an average ROIC (Return on Invested Capital) of around 20% over the last 10 years, Mark has shown the world he is capable of running a highly efficient company.
He is a bold and ethical person, who looks after the shareholders and employees and treats the company as if it was his —it is actually his. Mark has his fortune bound to Meta’s results. Mark's entire fortune is directly tied to Meta's results. If the company does badly, it will impact his money. Therefore, we know he’ll do the best he can.
Having Mark leading Meta ensures he will do the right thing for the company and its future.
Financials
Meta has strong and robust financials as well.
Their revenue has grown at an incredible rate for many years. In 2012 its revenue was $5 billion, you fast forward nine years and you see how Meta has increased its revenue more than 23 times, getting to $118 billion in 2021.
Its revenue has grown on average 41% annually. That is insane. Imagine your wage increases 41% every year.
Although this growth is unsustainable and will inevitably slow down, it’s proof of Meta’s strong position in the market and in society.
Valuation
We can calculate Meta’s intrinsic value with a discounted cash flow on its free cash flows for the future 10 years.
Although we have seen a huge 40% annual growth until now, we cannot expect it to continue. Also, Meta is facing problems with the iOS (Apple) they can’t control and the metaverse is not a certainty. Therefore, our growth assumptions must be conservative:
A growth rate of 12% for the first 5 years (from now to 2027)
A growth rate of 8% for the last 5 years (from 2027 to 2032)
A discount rate of 15%
With that, and applying a margin of safety of 30% —we always want to use a margin of safety—, we get a conservative intrinsic value of around $178 per share.
Meta is currently trading at $172 per share.
Conclusion
Meta is a great company with a strong business model. Although they are working on the metaverse —and its future is still uncertain— their online ad business is robust.
The company is trading at a discount to its intrinsic value. It currently offers an annual return of 15% —including a 30% margin of safety.
Based on our assumptions, Meta is currently a strong buy.
Disclaimer: our content is intended to be used for information and education purposes only. This article is not financial advice or a buy/sell recommendation. Do your own analysis before making any investment based on your own personal circumstances.