{"id":6843,"date":"2023-10-29T21:24:49","date_gmt":"2023-10-29T21:24:49","guid":{"rendered":"https:\/\/infundpros.com\/news\/meta-doesnt-have-the-returns-to-justify-its-valuation-nasdaqmeta\/"},"modified":"2023-10-29T21:24:50","modified_gmt":"2023-10-29T21:24:50","slug":"meta-doesnt-have-the-returns-to-justify-its-valuation-nasdaqmeta","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=6843","title":{"rendered":"Meta Doesn’t Have The Returns To Justify Its Valuation (NASDAQ:META)"},"content":{"rendered":"
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Meta Platforms (NASDAQ: NASDAQ:META<\/span>) has seen its share price skyrocket from its lows, as investors become less concerned about its AR\/VR spending. Apple (NASDAQ: AAPL) entering the industry has likely been a strong source of support. The company does maintain a strong core business, but its ad business continues to see threats.<\/span><\/p>\n

Our thesis with Meta Platforms is simple. The company is at a $760 billion valuation in a rising interest rate environment. To justify that valuation, you need shareholder returns. The company is chasing an AR\/VR dream with no sign of profit, and seeing growing competition across its product lines, making it a poor investment. <\/p>\n

Meta Financial Performance<\/h2>\n

The company’s financial performance shows improved revenue supported by developed markets.<\/p>\n

\"Meta<\/span> <\/picture>
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Meta Investor Presentation<\/span><\/p>\n<\/figcaption><\/figure>\n

The company took a major impact from Apple’s privacy changes, however, it’s worked to improve targeting for advertisers. Still it has achieved what we consider “full penetration” in the US & Canada market and there’s no indication of revenue growth here. Rest of world revenue has remained strong and supported the company’s revenue and Asia-Pacific revenue has grown. <\/span><\/p>\n

YTD the company’s stock has more than doubled. Most of that has been hype, as clearly evident above, the story around the company’s financial picture has not changed YTD. However, with the emergence of Chat GPT, technology stocks are interesting again, and Meta Platforms remains one of the most popular and well known companies. <\/p>\n

Meta Expenses<\/h2>\n

However, the company’s margins remain worse than they were several years ago, by a noticeable amount. <\/p>\n

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Meta Investor Presentation<\/span><\/p>\n<\/figcaption><\/figure>\n

The company’s advertising revenue along with its overall revenue made it one of the company’s strongest quarters ever from a top-line perspective. However, despite a modest recovery in its operating margin from 25% to 29%, margins still remain well below the 40+% that they were just several years ago. <\/p>\n

The company’s most recent quarter had strong margins, as revenue bounced up, but a decline in Reality Labs’ revenue shows the company has no real path to generating returns from the division. The company had massive layoffs and focused to increase margins, but we have yet to see if the company’s recent margin increase is sustainable. <\/p>\n

The company is trading at a P\/E of ~20x. That’s a 5% shareholder yield, in line with current long-term treasury rates. For a company to be trading at a relatively low yield, we expect the strength in growth to justify it. The last several years do not indicate that that’s the case. <\/p>\n

Meta Customer Activity<\/h2>\n

The company has seen customer activity increase, but growth rates remain fairly fixed. <\/p>\n

\"Meta<\/span> <\/picture>
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Meta Investor Presentation<\/span><\/p>\n<\/figcaption><\/figure>\n

The company’s DAP \/ MAP ratio has remained roughly constant at 79%. That shows it’s not increasing or improving the ratio. We don’t have the fundamental data here, but our guess is this is an intrinsic property of human activity and social networks, and we don’t expect this ratio to increase dramatically. <\/p>\n

Any decrease would be a large cause for concern. The company’s growth rate is now in the mid-single digits per year. The company’s largest source of customers is less its penetration into existing markets, and more continued growth in global internet access. Global internet access is increasing by ~4%. The company’s annualized user growth is a mere 3% above that. <\/p>\n

A lack of dramatic growth isn’t “wrong”, but it’s also not something you want to see from a company that’s valued as if it’s continuing to grow rapidly. <\/p>\n

Ad Business Threats<\/h2>\n

The company’s core ad business also faces threats. <\/p>\n

We recommend an exercise for readers. Compare the valuation of the largest internet companies from 25 years ago and today. Compare the valuation of Yahoo and Myspace at their peak versus Google and Facebook today. You might find some things that’ll surprise you. <\/p>\n