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Facebook’s Metaverse Will Be a Playground for Advertising

Stock (Symbol)

Facebook (FB)

Stock Price

$331

Sector
Technology
Data is as of
December 9, 2021
Expected to Report
January 25
Company Description
Facebook, Inc. is a social networking company, products include Facebook, Instagram, Messenger and WhatsApp. The Facebook mobile app and Website enables people to connect, share, discover and communicate with each other on mobile devices and personal computers. Messenger is a mobile-to-mobile messaging application. Instagram is a mobile application and Website that enables people to take photos or videos, and share them with friends and followers. WhatsApp is a mobile messaging application and allows people to exchange messages. Source: Thomson Financial
Sharek’s Take
David SharekMeta (FB) has grand plans for a metaverse virtual world. It’s bound to be a great place to connect with your Facebook friends or Instagram followers, as well as being a new world of advertising. I think FB has the best console for the metaverse at this time in its Oculus Quest 2, but Roblox has the best virtual world. And to help facilitate the movement of money, Facebook launched a digital wallet, Novi. Novi will enable users to send and receive Pax Dollars, a digital currency “stablecoin” that tracks the U.S. dollar. There will be no fees to send or receive money, and no fees to withdraw from your bank account. This is all BIG news, but in the meantime the company is getting hurt from Apple’s App Tracking Transparency (ATT) framework, which gives better privacy protection to Apple users. Apple’s ATT caused Facebook’s accuracy of ad targeting to decrease. This hurt FB’s advertisers.

The company Facebook changed its name to Meta in October 2021. Meta builds applications that enable people to connect and share with friends and family through mobile devices, personal computers, reality headsets and in-home devices. On a daily basis, it is estimated that around 3 billion people used at least one Facebook services, as well as more than 200 million businesses use their e-commerce platform. The company generates substantially all of its revenue from selling advertising placements to marketers. Facebook Stores is a catalyst for the company. Stores are storefronts for businesses to bring ecommerce to the Facebook family (including Whatsapp and Instagram). The company is also trying to implement augmented reality and virtual reality into the buying process, so consumers can see what an item looks like on before buying. Whatsapp makes it easy for Shop business owners to text customers with order updates. There are now more than 1 million Shops and over 250 million monthly visitors. Facebook apps include:

  • Facebook — a social network that allows people to view friends pictures and posts, as well as news and events. Almost half of the time spent on Facebook is watching videos. Facebook Watch is growing rapidly. Management noted that video is becoming the primary way that people are using Facebook’s products and services. The company is building new monetization tools for video creators so that they receive compensation for making good contents. The company is also adding QR-coded payment features in Messenger in the U.S. and they are making Facebook Pay available outside their apps. FB is also developing monetization tools such as Live Breaks and Live Shopping. The company is also launched Bulletin for publishing and subscription service for writers.
  • Instagram — a photo and video sharing app that allows people to explore interests that are sometimes outside of their friends network. On Instagram, Reels was the largest contributor to engagement growth. Recently, FB announced that they are investing $1 billion for the development of creator tools in Facebook and Instagram. Creator tools will be free to use until 2023.
  • WhatsApp — a secure messaging app that is used to text or video chat. WhatsApp makes it easy to compile a chosen set of friends for a group chat.
  • Facebook Reality Labs — next qtr Facebook will break out Facebook Reality Labs as a new segment. Reality Labs will include augmented and related hardware, software and content. Facebook has a catalyst in Oculus Quest 2, a thick eye goggle device with two hand controllers for people to connect with virtual reality worlds. Oculus 2 sells for $299-$399.

During the past four qtrs, FB delivered profit growth of 52%, 93%, 101% and 34% respectively. That’s great! Looking ahead, analysts expect -1%, -9%, -9% and 3% profit growth the next 4 qtrs. That’s bad. But Wall Street seems to be ok with this as the stock has been doing good through a rough market for growth stocks. FB has held-its-own because the P/E is only 23. The stock also has a robust Estimated Long-Term Growth Rate of 21% per year. Management buys back stock but FB does not pay a dividend. Last qtr, management repurchased $14 billion in stock (and it still had $58 billion left over). FB is part of my the Growth Portfoli0 and Conservative Growth Portfolio. The metaverse will be a playground for advertising, but Apple’s iOS changes cult crimp Facebook’s ad business.

One Year Chart
This stock has had good profit growth the last 4 qtrs, but everyone is focused on the future. That might mean flattish profit growth for a bit. I’m concerned that Apple could hurt FB’s profits this qtr, and cause the company to miss estimates.

The Est. LTG just decreased from 29% to 21%. That may be because the company will be spending big on R&D (at least $10 billion in 2021).

The stock’s P/E of 23 is very reasonable. Investors just have to understand this is a long-term investment as the company is transitioning. 

Earnings Table
Last qtr, Facebook delivered 34% profit growth and beat estimates of 32% growth. Revenue increased a solid 35%. These were great numbers! Ad sales in the Rest of the World posted highest growth at 50%. Europe, North America, and Asia Pacific increased ad sales 35%, 31%, and 28%, respectively. Here are some other stats from last qtr:

  • Advertising revenue grew 33%
  • Average price per ad grew 22%
  • Number of ads delivered grew 9%
  • Other revenues grew 195%
  • Both Daily and Monthly active users grew 6%

Solid sales performance was fueled by growth in ad impressions and average pricing levels per ad, partially offset by Apple’s iOS 14 changes, a slowdown of e-commerce growth as people purchased in person again, global supply chain issues, and COVID-19 resurgences in Southeast Asia.

Annual Profit Estimates fell across the board. 

Qtrly Profit Estimates are for -1%, -9%, -9%, and 3% profit growth the next 4 qtrs. Note qtrly estimates fell (metaverse spending/Apple). Next qtr, the company plans to release new operating and revenue reporting structure namely: Family of Apps, which will include Facebook, Instagram, Messenger, and WhatsApp; and Facebook Reality Labs, which will include augmented reality hardware, software, and content.

Fair Value
Looking ahead for next year, My Fair Value is a P/E of 25, which is reasonable. In the Profit History table the Current row shows where the stock is this qtr, and the next two rows show my projections for 2022 and 2023.

My Fair Value’s are $356 for 2022 (+8% upside) and $432 for 2023 (+30% upside).

But its tough to get a handle on what FB’s valuation (P/E ratio) should be. The metaverse might entice investors to get excited about the stock, and push the P/E towards 35. Or profits could come in under current expectations due to metaverse spending and/or Apple’s iOS.

Bottom Line
Meta (FB) ten-year chart is pretty perfect outside of a handful of corrections. It’s right on its long-term trendline now if you put a ruler up to the screen. The stock opened at $42 in May 2012. I didn’t have all the data for a ten-year chart. The stock is in reach of becoming a ten-bagger within its 1st ten years.

The metaverse is gonna be a playground for Facebook and Instagram advertisers, and the Oculus 2 is already a hit with users who want to climb into virtual gaming-type worlds. As FB progresses, computer graphics will be more advanced and there will be fun events, like concerts to attend and sit in front-row seats. 

FB falls from 3rd to 7th in the Conservative Portfolio Power Rankings due to uncertainty. 

The stock moves from 21st to 25th in the Growth Portfolio Power Rankings because there’s not much near-term upside to my 2022 Fair Value.

Power Rankings
Growth Stock Portfolio

25 of 32

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

7 of 37

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