Okay so the next stock on this list is Meta
Now meta or Facebook reported earnings on Wednesday, February 2nd. And The stock dropped
26% after the announcement, leading to a huge $200B loss in value for the company, which is
actually the new record for the largest one day drop in value in the stock market's history.
There's been probably the most insane number of headlines I've seen come out
after this earnings report, with every stock genius with full 20/20 hindsight saying how
Meta has been doomed and this was obviously about to happen. However, on this channel,
I try to de-sensationalize these things and give you guys accurate information in full context
so you can get a complete picture of what's actually going on with the company and not
lazily reported stats that may explain certain parts, but won't give you the full picture.
So let's look into the report and figure out if headlines like this, Facebook stock crashes
after user base starts shrinking, its one of the worst crashes in stock market history.
Okay so here's what Facebook or meta actually reported.
Earnings per share came in at $3.67 vs $3.87 expected, which is an earnings
miss. Revenue came in slightly higher though, at $33.67B vs $33.4B expected.
Daily active user growth, came in at 1.93B vs 1.95B expected.
Just to put that in context, the whole world as a population of 7.9B people,
so 1.93B people using a meta app daily is a massive number. Those Daily
Facebook/Instagram and WhatsApp users are about 1 out of every 4 people on the entire globe,
which includes people who live in parts of the world with no internet access.
So coming in at 1.95B vs 1.93B to me isn't a big deal because the advertiser pool is
still enormous, and there are plenty of users still there to sell ads.
What really made the headlines was that Facebook's revenue guidance for the first
quarter of 2022 came in at $27B to $29B, which is short of the $30.15B expected,
which would be somewhere between 3% to 11% growth from last year.
Now what's happened is Apple has made changes to their privacy settings that
have hurt Facebook's ad business uniquely compared with google.
During the earnings call, Mark Zuckerberg said that Apple's Add Tracking Transparency feature,
or ATT will cut $10B of Meta's earnings in 2022.
Let me explain how that will happen.
Your Apple devices have identification for advertisers or IDFA. This is what Apple uses
as an ID for advertisers to understand what you're interested in, without identifying you
personally. For example, I recently turned on all of my ad tracking to test out signing up for focus
group interviews. After I turned ad tracking on, I just started googling focus groups until basically
all of my Facebook and Instagram ads show up as paid surveys, medical research,
or focus groups where I get interviewed for an hour in exchange for an Amazon gift card.
The advertisers don't know it's Nick Daly searching focus groups 15 times in
45 seconds. They just know this particular ID is very interested in focus groups.
The problem now is that because so many people have opted out, Facebook isn't able to
target users as well. So if I had kept all my ad targeting off, I could have done the same search,
but it wouldn't have given me all the focus group ads I'm getting now, because the advertisers would
have the information to know I'm very interested in focus groups.
Now Apple has introduced a replacement for their old ad tracking system that's
more privacy-friendly. Still, meta and Snap have said it's less efficient.
The bigger issue for meta is they don't own the platform customers are using
meta on. If they can only access customers through Apple devices or Google devices,
they're at the mercy of Apple and Google. And Google's business is way different since it's
ads are served when somebody is actively searching for something,
basically telling advertisers what they want to see, vs FB who has to try to figure that part out.
Now some analysts are seeing that customers aren't able to get the same return on investment for
Facebook ads. They're buying more google ads. There's no concrete information stating this,
but the idea makes sense and is something to pay attention to.
Okay so the red part of the bar is the last quarter of facebooks earnings with
the 3 quarters before giving you the full year of earnings for each quarter.
Now, this definitely shows flat growth as Facebook
tries to figure out how to navigate ad tracking better,
so not a great sign. Still, in all seriousness, this situation could have been much worse.
However, when we look at the full-year revenue and net income for the past 10 years,
it's pretty hard to tell anything bad happened on this chart. From here,
it actually looks like Facebook is continuing along as normal.
When we look at their revenue vs expenses we can see that Facebook actually has almost
no cost of revenue. Which does give Facebook some room to work with. If
advertisers using Facebook ads are going to experience less efficiency in their ads,
those bids for the ad slots will come down over time, decreasing some of Facebook gross margin.
Now meta's expenses aren't too surprising. They are pretty dominated by their family
of apps segment, which makes up all their profit and revenue. But I want to point out
that their reality Labs segment has a long way to go and is entirely supported by the ad business.
Last year they actually lost over $10B on their reality labs.
Now Facebook actually has a pretty interesting chart showing daily active people, defined as
the number of people who visited at least one of their apps on any given day. We can see since
December 2019, Facebook has increased this number from 2.26B to 2.82B by the end of the year.
Okay, so when we look at the current earnings forecast for Meta,
the current expectations are for them to grow from $118B
in revenue, and $39B in profits to $176B in revenue, and $46B in profits by 2024.
When we look at the revenue growth is much slower than what Meta has
been doing in the past. However, net income growth is actually projected by
2024 to be slower than the revenue growth hitting only 9% by 2024.
So I think to value Meta, we should use an 8% growth rate,
a super conservative number for the bottom end of the range, and 12% for the top end of the range.
This gives meta a fair PE range between 18 for the bottom end, and 26 for the top end of the range.
So When we look at this valuation charted out, I want to say that I am going extremely
conservative in my opinion with that 8% growth rate, But Meta's current price of $237 per share,
is very cheap compared to what the company is worth. By 2024 Facebook has an upside
of $299 using very conservative measures and a high-end range
of around $432 using a more moderate but still pretty conservative estimate. However,
if the earnings dip like the Current forecasts says during 2022, I expect Facebook's share
price to stay lower. But also keep in mind that this is the low-end estimate. If Meta
recovers better and faster than the current expectation, they will exceed these returns.
Now I think Facebook will figure out a way to adapt to the new privacy changes. And I think
most of us recognize how good Facebook has been at this in the past, but for at least
the next year or two, it is an obstacle they'll have to figure out how to overcome. Right now,
I would say Facebook is between a hold and buy. It's cheap, and I expect the stock will rebound,
but I think it may stay down if 2022 does report a decline in earnings. If you
don't care about this dip and are entirely focused on 2024, this stock is of course,
a buy. If you already own, don't sell. I know I won't. Meta will be back. Just give it time.
Now that video you just watched is part of a much larger video where I covered the earnings
for multiple stocks, so if you want to see the whole thing, click this link right here.
And as always, thanks for watching!