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Time for some face time with Meta Platforms

January 8, 2023

I have just been reading a piece suggesting that it is time to buy shares in Meta Platforms, formerly known as Facebook. There are signs of life in the chart, which scores 3/9 because the share itself scores 3/3. It is debatable because all three signals, golden cross, trend line break and Coppock are just happening. The good news is that the shares have had a big fall and much of the fundamental damage is self-inflicted with Zuckenberg’s huge bet on the metaverse.

He may be the master at Facebook with over 50pc voting control but if the private equity guys move in they will be able to force strategic changes just as they have done at companies like Apple. If they perceive value in Facebook, which seems likely, this could happen and would be an explosive something new.

I have to agree with the guy recommending the shares that FB is a staggering business.

Meta Platforms (NASDAQ:META) offers a range of products that facilitate the connection and engagement for individuals, communities, and businesses through various channels, including mobile devices, personal computers, and more recently virtual reality headsets. META generates revenues from its Family of Apps (“FoA”) and Reality Labs segments, with over 95pc of revenues coming from its FoA segment, which consists of its platforms: Facebook, Instagram, WhatsApp, and Messenger. With over 2.9bn daily active users and over 3.7bn monthly active users as of the latest quarter report, META has almost has half of the world’s population using its platforms. Talk about influence! This capability enables the company to capture a significant share of the digital advertising spend worldwide.

Seeking Alpha, 7 January 2023

The platforms are used by almost half the planet. This must offer an incredible monetisation opportunity. As the analyst goes on to say.

Let’s not forget that the company has a TTM [trailing twelve months] cash flow from operations of $54bn which allows it to fund its operations, strategic investments, and massive share buybacks. Further to this, META will be able to take advantage of future opportunities in the metaverse market, artificial intelligence market and will be able to continue to have a dominant position in the global digital advertising market. 

Seeking Alpha, 7 January 2023

The bad news has been a margin squeeze caused by a combination of falling revenue from the FoA business combined with huge losses from the Reality Labs investments.

The total losses incurred by Reality Labs during the past 2 years amount to $21.7bn. We then have the fact that FoA operating income has been decreasing during the past 3 quarters in relation to the same periods during 2021. The combination of these two factors has significantly reduced the company’s operating margin.

Seeking Alpha, 7 January 2023

This is the kind of opportunity that Warren Buffett often seizes upon where a great business is undermined by temporary adverse factors. It seems to me that in the long term there are two possibilities; either the Metaverse strategy works or Zuckerberg, willingly or unwillingly, abandons it. Either way the shares should eventually benefit and be valued to reflect the huge scale and potential of its operations.

One thing is for sure; with net cash of $26.5bn on the balance sheet and that cash flow generation, there is no danger of the business running into financial difficulties.

The chart is speculative at the moment. There is a case for making an initial exploratory investment with a view to a larger commitment when they become a perfect 10.

Strategy

Inevitably some shares are going to give buy signals before the main indices and relevant ETFs turn higher. Meta Platforms is part of the Nasdaq 100 and the various FANG ETFs all of which are presently in steep downtrends, which is why it only scores 3/10. Movement on the Metaverse strategy is probably the key to the fundamental 1/10 we need to take the shares to 10/10 when the indices and the ETFs turn higher.

Sheryl Sandberg, the COO at Meta Platforms, was a key associate of Zuckenberg until she stepped down in August 2022. But Zuckerberg is obviously a clever guy, no doubt surrounded by other clever guys, not to be written off lightly. There is a limit to how long he can ride rough shod over the interests of the minority voting shareholders who actually own 87pc of the business and will not tolerate a falling share price indefinitely.

It’s not going to happen but imagine if a super wealthy private equity group, perhaps backed by Warren Buffet’s Berkshire Hathaway, stepped in and bought Meta Platforms and started to run it for cash. The buyout price would be way over the current price and the buyers could still keep investing in the Metaverse strategy, just on a more focused scale. One day Zuckerberg may decide that is what he should do.

Or the Metaverse strategy could win in which case also the shares would explode. Another key Metaverse stock with its world of Avatars is Roblox. I am always hopeful about this company but presently they score 0/10. The latest earnings report showed the company still growing but presently it is all about valuation. In a nutshell where investors were prepared to value companies at 20 times revenue or more that number is closer to five which straightaway takes 75pc off the valuation. No wonder shares are taking a battering, especially those which were valued at 20 times sales.

My rule of thumb is that exciting growth shares with something unique about their products and or services should be able to make 20pc profit margins as a mature business. If that is a reasonable assumption you could say that a valuation of five times sales is like a PE ratio of 25, which is not a huge amount for a fast growing business. Bear markets may require shares not just to be reasonably valued but positively cheap but at least we are starting to see room for shares to move higher.

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