Meta Platforms, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Meta Platforms, Inc., formerly Facebook, operates a suite of social media platforms and related technologies, connecting people globally and generating revenue primarily through advertising.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Meta Platforms, Inc. is a technology behemoth that, at its core, facilitates social interaction and connection through its suite of platforms, notably Facebook, Instagram, and WhatsApp.

Facebook, despite its evolution into a broader entity, remains the flagship service of Meta.

Revenue Streams

Nearly all of Meta’s revenue is driven by advertising.

  • Advertising: Meta’s revenue is largely derived from advertising, with a heavy reliance on advertising displayed on Facebook and Instagram. Advertising revenue includes direct response and brand ads, where advertisers seek to achieve specific performance metrics or brand awareness.
  • Metaverse/Reality Labs: Revenue from this segment is primarily derived from sales of virtual reality and augmented reality devices, along with sales of virtual and augmented reality content. However, this area is still a small part of revenue when compared to advertising. This includes Horizon Worlds, but is still very early stage and not meaningfully generating any returns.
  • Radio Labs (RL): Revenue from RL is very limited and generated from the selling of content, products like Meta View (which will be sunsetted soon).

The social media and advertising space is immensely competitive and fast-moving. Trends to note include:

  • AI Integration: AI is increasingly being integrated across various platforms, from content creation to targeted advertising, which is leading to rapid changes in the industry and the way ads are placed.
  • Evolving Privacy Expectations: As governments and regulators are increasingly putting up rules to protect user data, there are considerable changes in the way data is collected, stored, and utilized.
  • Mobile-First Consumption: Consumers primarily access the Internet through mobile devices, which results in shifts in advertising tactics to adapt to the smaller form factor.
  • Short-Form Video: With the rise of Tiktok, short-form video content has become a major way in which people consume content and social media companies need to provide that. This is also hurting advertising revenues, especially of facebook, which has to compete with tiktok and other companies in the short form vertical.
  • E-Commerce Integration: Social commerce is growing with users shopping directly through platforms, which adds a new dimension for companies to provide in their businesses.

Meta competes in a heavily congested landscape with rivals like Google (Alphabet Inc.), TikTok (ByteDance), Amazon, Twitter (now X), and a plethora of smaller platforms across the world. New entrants are also a constant threat. Meta’s competitive edge is based on its network of users, brand recognition, and its targeted advertising prowess.

In the long-term, the competition for advertising dollars is set to become more intense as companies increasingly compete for attention-for both engagement and advertisement.

Company Financials

Meta’s financial performance is directly tied to the health of the digital advertising market.

  • Revenues: As detailed earlier, Meta generates the vast majority of its revenue through advertising. Total revenue was $34 billion in the third quarter of 2023, a 23% increase compared to same period in 2022. Full year 2022 revenue was $117B, a 1% decrease from 2021.
  • Profitability: Net income was $11.6 billion for Q3 of 2023. For full year 2022, net income was $23 billion. This represented a significant decrease year on year, and this was mainly due to the higher operating costs related to metaverse investment. But operating margins for the past few years are quite solid. For Q3, the operating margins was 40%.
  • Free Cash Flow: Meta’s free cash flow was about $7 billion in Q3 of 2023, which is good.
  • Capital Expenditures: Capex is estimated to be around $31 billion in 2023.
  • Balance Sheet Health: Meta has had excellent liquidity on hand, but is now starting to be more aggressive with stock buybacks and dividends as it matures. But that means it still has enough liquidity to support any future plans, and also reduce volatility in its shares. Net cash and cash equivalents were $30 Billion as of Sep 30, 2023.
  • Debt: Even though Meta’s net debt is quite low, it has added debt to the balance sheet in recent times, as it needs to fuel metaverse investments and capital distributions. The company had total debt of $26 billion on Sep 30 2023, which while significant, is not concerning at all since its cash holdings are higher than debt.
  • Share Repurchases: Meta has increased its share buyback program as its share price has dropped dramatically. This shows confidence in their own business, but also reduces the outstanding shares, boosting EPS. For example, in Q3 of 2023, $3.7 billion in share repurchases were done.

Moat Assessment

Meta’s moat is complex and somewhat contentious, with arguments to be made for a narrow and wide moat.

  • Network effects: Meta’s network effects, especially within Facebook and WhatsApp, are undeniably strong, where they benefit from having millions of users all over the world. However, these networks are no longer insurmoutable, and Tiktok, for example, has been able to create a very strong competing network.
  • Brand recognition: Meta’s brands are recognizable all over the world, however, that alone does not create a strong moat, it only helps.
  • Switching Costs: It is becoming increasingly easier for users to switch to other platforms as the users do not have to put in a lot of effort in switching from one social media app to the other. While there are some switching costs (e.g. memories from Facebook), they are not insurmountable by any means.
  • Proprietary Technology: While Meta is constantly pushing cutting-edge technologies (like AI) that will improve its business, the advantage conferred is usually short-term, since the technology is easily copied or improved.
  • Pricing power: Meta has pricing power in its advertising market, but faces competition from various new advertising players (like TikTok and amazon). They are not a near monopoly, but an oligopoly.

Therefore, based on all these factors, I rate Meta’s Moat as 3/5 as it has a good but not excellent hold on the competitive landscape, and it is facing major disruptions and challenges in the recent years.

Risks

Meta faces an array of risks that have potential to harm its competitive position and overall value creation.

  • Technological Obsolescence: Meta is still heavily dependent on its apps in their current form, and they may become obsolete very soon due to new innovations. The company needs to keep improving its products and incorporate new technologies, like AI, or else its products could lose their importance in the industry. This is a big risk given that the main products are mainly in short form and messaging, and it is not clear if metaverse will be a new strong product for the company. Also, the changes in user preferences and requirements will have some impact on usage and growth.
  • Regulatory scrutiny and Data Privacy: Meta is under increased regulatory pressure for how it handles data and privacy. This is a very big risk, and is not confined to just Meta, but all big social media companies are under immense government pressure. There is a real chance that regulations are put into effect, and that may have a large negative influence over their bottom lines.
  • Competition: With competitors increasing in the social media space, the market share of Meta is always threatened. The biggest threat right now is tiktok, as it has grabbed a lot of market share from Meta in the social media space.
  • Metaverse Investments: The company has invested heavily in the metaverse, but there is no assurance that the return will be profitable. In fact, the metaverse division is generating big losses, and that is one of the reasons that the company had a bad year in 2022. They need to quickly monetize their metaverse investments or the company will be less profitable. There is a strong chance that the metaverse may ultimately fail to provide the returns it was set up to do.

Understandability Rating

While the business is generally understandable, there are lots of complex technologies and revenue sources.

Although the core functionality of Meta’s apps is relatively easy to understand, the business model, especially with metaverse and AI, is more difficult. The interplay of technical advancements, regulation, user behavior, and the complexities of its large-scale operations all make the business model difficult for most people to understand in detail. Therefore I rate its Understandability as 2 / 5.

Balance Sheet Health

Meta’s Balance Sheet health is quite strong, with lots of cash and very little debt. However, debt has increased somewhat recently.

Despite recent financial moves, Meta has a great balance sheet, with cash on hand and low debt, and the business is generating very good cash. So I rate its Balance Sheet health 4 / 5.

Recent Concerns

Meta has had some concerns, particularly with the metaverse, but also regulatory scrutiny, all of which have had an impact on performance.

Meta is facing:

  • Metaverse Doubts: After Meta poured billions of dollars into the metaverse, doubts have increased on profitability, since the metaverse division is losing a lot of money, and is not yet showing concrete returns. Management has acknowledged some of the challenges in this space, and has indicated that investments will continue in this field.
  • Regulation and Privacy: Governments all over the world are trying to tighten rules around data privacy and online advertising. Also, there is increased effort to enforce rules, which means the compliance cost is set to increase for companies such as Meta. Management has acknowledged that they are working with different countries to fulfill regulatory requirements.
  • Competition with Tiktok: Tiktok’s emergence as a powerful short-form video platform is directly affecting Meta’s platforms, because Meta’s revenue is falling due to increased competition from Tiktok.
  • AI Integration Challenges: Integration of AI in its products is both an opportunity and a challenge for meta. It is not known which company will become the leader in this field. And the competition is very intense with other giants (google etc) in this market.

Overall, Meta’s long term prospects are uncertain, since its revenue, profit, and competitive positions are changing rapidly. The company needs to do better in AI and figure out a way to generate profits from the metaverse and also stem the loss of market share to competitors like tiktok.