Meta Platforms: Volatility Is Overshadowing Quality - Seeking Alpha
Facebook Unveils Meta

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I believe Meta’s (NASDAQ:FB) advertising business is still strong and a necessary part of many businesses’ advertising expenditure, even following Apple’s (AAPL) IDFA update. In my opinion, Meta will continue to effectively monetize the Family of Apps platforms in the wake of IDFA changes and slowing user growth to increase revenue per user domestically and internationally. Through potential continuous ad algorithm improvements, e-commerce, and international focuses, Meta may continue to generate earnings power and free cash flow to potentially support strong returns.
Even with new capital expenditures in the metaverse and other competitive pressures, I believe Meta is still attractive at these levels. Success with the metaverse and reality labs may help increase potential returns in the long run but even excluding those segments, Meta presents attractive potential ROIs in my opinion.
I’ve covered Meta in the past so I will link my previous article for a more extensive background.
To summarize Meta in short, it operates the largest social media platform in the world, Facebook, with ~3 billion monthly active users. Meta’s business is broken up into two segments:
Meta makes the majority of its revenue (97.5% in 2021) by selling ads to businesses to market on their social media platforms.
I believe the recent stall in Meta’s userbase isn’t temporary:

FB DAU

Meta IR

FB MAU

Meta IR

Meta IR
Meta IR
Facebook users have grown from 845 million at the end of 2011 to 2.9 billion at the end of 2021, a 13.2% CAGR over that decade-long period. After that explosive growth, I believe user migration growth may stall moving forward making effective monetization in advertising even more important. I believe even with iOS 14 advertising headwinds, Meta has shown promise in this realm as revenue per user metrics have grown healthily over the past year:

ARPU Metrics

Meta IR

Meta IR
This data is reassuring knowing Facebook was able to still grow ARPU by 14% YoY while adjusting to the new IDFA changes Apple introduced with iOS 14. I believe WhatsApp is in the early stages of general monetization while Facebook and Instagram are still aiming to make a larger footprint in e-commerce. With these prospects on the table, I still think Meta can grow ARPU over the long term.
While excluding Metaverse, I believe Meta’s advertising business is still discounted at the current market value. With that being said, as long as management continues to focus on the core advertising algorithm and boosting revenue per user metrics, the potential windfalls from wide Metaverse adoption could support long-term earnings growth.
I don’t believe a flop in the Metaverse will financially impact Meta long term enough to completely deter investors from the stock at current levels. I do think the Metaverse has the chance to change the Family of Apps advertising business shareholder base in the future which may cause volatility in the short term. In a longer view, I believe if the Metaverse is a flop, both Metaverse and advertising-driven shareholders will lose confidence in management potentially forcing the share price down even further.
Social media companies (advertising companies) are all looking for the most watch time in order to generate more ad revenue by businesses marketing on their platform. I believe the industry landscape is inherently competitive but is also heightening for Meta’s Family of Apps. Currently, Meta’s Family of Apps holds 4 out of the top 10 spots of most popular social networks globally ranked by the number of monthly active users:

Most popular social networks

Statista

Statista
With TikTok and YouTube increasing monthly active users [MAUs] by 60.32% & 13.04% respectively in the last twelve months versus Meta’s Family of Apps increasing by only 8.79%, I believe Meta will have to continue innovating to fight for user screen time:

MAUs By Social Media App

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Below are my income statement forecasts for Meta over the next five years. Some key notes in my forecasts include:

FB Forecasts

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DCF pt. 1

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DCF pt. 2

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Price Targets

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I believe the current risks for Meta are significant and mainly revolve around a Metaverse flop and social media competition. While my earnings forecasts are minimally impacted by potential Metaverse growth, I believe the real risk lies in a changing shareholder base and lost confidence in management. In my opinion, these risks posed are severe but I believe they are relatively short-term and Meta’s advertising business still has the potential to deliver significant results over the next five years. Even though my earnings forecasts have growth decelerating and margins compressing relative to recent history, I still believe growth prospects including a more efficient algorithm, e-commerce, and international expansion could drive earnings power excess of my forecasts.
Last note, I believe the recent downside earnings revisions management has made are already reflected in the stock but I would still proceed with caution into the earnings release next week.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of FB, AAPL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This analysis is not a guarantee of future results, models and projections are based on inputs that are likely to exclude all factors that may reflect a complete analysis. Furthermore, calculation errors, inaccurate reporting, and unseen inputs could bias results. For financial advice please consult with your advisor or other professional.
This commentary reflects the personal opinions, viewpoints and analyses of the Alpha Squared Capital, LLC’s employees providing such comments, and should not be regarded as a description of advisory services provided by Alpha Squared Capital, LLC or performance returns of any Alpha Squared Capital, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this article constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Alpha Squared Capital, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
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