Meta Platforms: CAPEX, Efficiency, CAPEX…It never gets easy

Since we began tracking Meta Platforms ("META", "Meta", "Company"), the fundamental question we continually face is whether we trust Zuck to reinvent, innovate (or even copy – after all, what difference does it make?), and to treat shareholders fairly. This assessment has never been straightforward, with numerous ups and downs, but undeniably, history speaks louder than words.

The ongoing investments in Reality Labs, the emergence of TikTok, the emphasis on Reels despite low monetization, and concerns regarding its ability to navigate the impact of Apple’s App Tracking Transparency (“ATT”) are just a few factors that have influenced the fluctuations seen in the chart below, especially during 2022. Nonetheless, despite these challenges, Meta has managed to achieve an impressive 5-year share performance with a CAGR of 20.1%, far surpassing the S&P 500's CAGR of 12.5%, albeit similar to the Nasdaq's 100 at 18.9% over the same period.

Source: Koyfin (affiliate link with a 20% discount; if you are a paid subscriber, you can benefit from a 3-month free trial)

Following the unexpected 10.6% drop on the day of the earnings announcement on April 24, 2024 (yet it recovered), attributed to the anticipated increase in CAPEX to support AI investments (prompting recollections of the Metaverse era that failed to convince investors), we felt compelled to delve deeper into Meta. Our objective is to reassess the metrics important to our thesis and to revisit its valuation.

Contents:

1. Performance Update (Financials, Reels, WhatsApp, AI developments)

2. Industry Analysis

3. Valuation

4. Conclusion

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1. Performance Update

This section will provide a brief update on the numbers before we delve into key topics that will shape the future of the Company, such as Reels, WhatsApp, and AI developments.

a. Financials

After experiencing declines in 2022, attributed to factors like Apple's ATT and low monetization of Reels due to its significant share of time spent in Meta's apps, the Company has shown a recovery. Recent revenue growth rates have accelerated, with the latest quarter reaching 27%. Over 95% of Meta's revenue comes from ad dollars, and this recovery trend is driven by its Family of Apps (“FoA”), which also grew by 27% in the latest quarter.

Source: FinChat.io (affiliate link with a 15% discount for StockOpine readers)

Regionally, Meta's fastest-growing segment is Asia-Pacific, with a growth rate of +40% over the last three quarters, driven by the online commerce and gaming sectors. Meanwhile, its largest segment, North America, achieved a growth of 19% in the latest quarter, or 22% in ad revenue. A notable highlight from the last quarter was the significant improvement in price per ad in North America, which rose to 7%, up from 2% in Q4’23 and -7% in Q3’23. This, coupled with a 16% increase in ad impressions, fueled accelerated growth. Similarly, the pricing trajectory in Asia-Pacific shows promise, with a gradual reduction to a 3% decline over the latest quarter, compared to a 22% decline a year ago.

The key opportunity lies in monetizing users outside North America to at least half the levels seen in Europe. Efforts in WhatsApp (discussed later) are expected to contribute to boosting average revenue per user in Asia-Pacific above the $5.5 reported in Q4’23. Additionally, AI (also discussed later) has the potential to create further revenue avenues to support these efforts. While it may be naïve to expect these regions to match North America's metrics, the trend signals that Meta is taking the right steps. Although these metrics were discontinued, they underscore the future potential of Meta's expansion efforts.

Source: FinChat.io (affiliate link with a 15% discount for StockOpine readers)

Regarding profitability, Reality Labs ("RL") continues to weigh on operating margin and is expected to do so in the near future, as indicated by management. Initiatives like the Ray-Ban Meta glasses and Quest headset sales contributed to a 30% growth in RL revenues in the quarter, showing promise. However, it remains uncertain whether RL will have a significant impact on overall results. Yet, we acknowledge the foresight of Zuck and the strategic importance of establishing distribution channels for future ads if virtual reality becomes commonplace.