I’m not a fan of Facebook’s (FB) “Meta Platforms”. The company plays with semantics. In this article, I take the time to talk about this smoke screen, and why it is ultimately a distraction for investors.
Instead, investors should think about what FB does, and how it really makes money. Right now, the news and hype is all about the “metaverse” but in large part, it doesn’t make sense. Explain why.
Why did Facebook switch to Meta?
The news came back in late October 2021.
Today at Connect 2021 CEO Mark Zuckerberg introduced Meta, which brings our apps and technologies together under one new corporate brand. Meta’s focus will be on bringing life back to life and helping people connect, find communities, and grow businesses.
And in terms of switching for users:
It will let you share immersive experiences with other people even when you’re not together – and do things together that you wouldn’t do in the physical world. It’s the next development in a long line of social technologies, and it heralds a new chapter for our company.
naturally, and, most importantly, this means that FB can access almost anything that happens online, through digital channels:
I will revisit these ideas shortly. The key here is that the labels and names change, but basically, the work doesn’t really change much. Again, I’ll discuss that soon enough.
Metaverse in Mark’s words
I don’t want to spend a lot of time on this, and you’ll know why. But, as a good benchmark, here’s the “marketing talk” and strategic overview given by CEO Mark Zuckerberg:
The next platform will be more immersive – an Internet embodied where you are in the experience, not just looking at it. We call this the metaverse, and it will touch every product we build.
The defining quality of metaverses would be the feeling of being there – as if you were there with another person or somewhere else. Feeling truly present with another person is the ultimate dream of social technology. This is why we focus on building this.
In other words, the idea is that you are ‘in’ the internet, not ‘on’ the internet. You are part technology, part continuous flow, and part flows. Right now, presumably, you’re surfacing, not really deep in technology itself, along with technology and the rest of humanity.
But why now?
Point blank, FB has been battling a deluge of bad news and related issues. Here are just a few of those bad vibes:
- The mostly planned capital rebellion on the Facebook platform
- Not taking action (or slow to act) against Trump
- On the other hand, allegations of censorship and bias
So, that’s one thing. Then there’s the whistleblower problem:
There’s a lot, like Apple’s (AAPL) feud with FB, a different level of regulation pressure, and a few interruptions.
The main point is that Facebook has been under pressure. It’s not just one problem, or a slow hum, but instead, a tsunami.
Therefore, the name change appears to be a deviation from many issues; Smoke and mirrors. While “Facebook” is not the greatest name, business has evolved beyond the early concept. Still a strong brand. This is less relevant now, it seems, in light of the Switcheroo and jawboning.
Now this is the best part
Despite all the bad news, the pile of problems, and the confusing name change, FB is basically a very powerful company. On the surface, FB may not seem very attractive given what was covered above. It sure looks messy.
But FB is a very profitable and growing business. And the DNA doesn’t change much from what I can tell at this point. It is modern. It’s positioning.
Before showing this, consider how Alphabet (GOOGL) (GOOG) is supposed to be a larger company, with a great vision for the future. Or it’s a holding company, or something like that. But, here’s the truth: Most people think of Alphabet as “Google” and as a search engine. Smart investors understand that GOOGL is not a search engine, it is an advertising company. Really, really, deeply, that’s what he is, and that’s why he’s making billions, and he’s worth about $2 trillion. Plus, my gosh, it got just under $170 billion in cash, but not because it’s a great holding company. This is from selling ads.
All of this brings us to FB, who is also sitting on a massive pile of cash. You can see how it stacks up, quarter by quarter with your own eyes:
As of November 2021, FB has approximately $65 billion in cash. That’s roughly 2.3% of the total liquidity held by the S&P 500. Let that sink in for a minute.
Although FB earnings for the fourth quarter of 2021 aren’t available yet, we have the third quarter of 2021 to look at now. You will not easily find the distribution of revenue. However, the big picture, here’s how it breaks down for an analyst:
Facebook makes money mostly by showing ads from advertisers within its Facebook and Instagram apps. Ads represented 98% of Facebook’s $86 billion revenue in 2020. The remaining 2% came mainly from the sale of Oculus and Portal hardware, as well as payment fees from developers.
Zuckerberg himself explained how FB makes money:
Senator, we run ads.
Here it is, in just four words. Facebook is not a “metaverse” or a “social network” or anything like that. Just like GOOGL, we see one day that FB is almost exclusively an advertising company. That’s really all that matters.
Therefore, changing the name to Meta Platforms is largely irrelevant. What matters is the metrics. Revenues, profits and margins.
Brief presentation: very healthy
I’ll keep it simple. Good work. In fact, very good. Here is a look at the results for the third quarter of 2021:
The users are active. Activity is high worldwide, and growing. Interestingly, the United States and Canada are only a small part of the story. Look to the Asia Pacific region and the rest of the world for the real catch.
Two things to understand from these charts above. First, again, it’s easy to miss that about 98% of Facebook’s revenue comes from ads. The amount is so high, it almost outperforms another category. Second, while the US and Canada are not nearly as “active” as the Asia Pacific region and the rest of the world, the vast majority of revenue comes from there. America, Canada and Europe disproportionately support business.
And very quickly:
Operating margins are excellent. Since the third quarter of 2019, the percentage has exceeded 32%. And even in the “hard times” of 2012 and 2013, FB was still doing well enough, collecting profits with those weaker margins.
At these prices, FB is a good buy and I’m optimistic here. Assuming FB continues to grow at 17-20%, but does not experience any price-to-earnings expansion at all, the forecast is for a fairly conservative 10% return.
I’m using some analyst estimates here but there’s nothing surprising or surprising here. This is a strong and growing advertising company, which has huge advantages, including network efforts, strength of the brand, relatively low capital expenditure, etc. The next 3-5 years look bright for FB. Once again, I am an optimist.