5 ESSENTIAL things to consider before buying Facebook at a massive 40% Discount
Meta stock crashed Thursday after Facebook's parent, Meta Platforms, offered a muted revenue outlook as corporate challenges multiply. Even as Meta is spending and has pivoted into the ambitious goal of shaping the Metaverse, it's core cash-cow of mobile advertising is facing competition and regulatory concerns. Is Facebook, or "Meta", as they now call themselves, a good buy at a 40% discount? Or has the internet giant fallen from its pedestal of internet domination?
Meta Earnings, Growth Outlook
Meta reported Q4 adjusted EPS of $3.67, down 5% from a year ago and below estimates of $3.85. Higher expenses played into the earnings miss. Revenue grew 20% to $33.67 million, roughly in line with the consensus.
Meta's Reality Labs division, focused on growing the metaverse via augmented- and virtual-reality headsets and software, lost $3.3 billion in the quarter on revenue of $877 million.
Meta's Family of Apps, including Facebook, Instagram, WhatsApp and more, had operating income of $15.9 billion on revenue of $32.8 billion.
Facebook's Metamorphosis
Facebook's Oct. 28 name change to Meta made sense for multiple reasons. It's probably no coincidence that it happened as Facebook was being treated as a political pariah, alleged to profit from pushing politically divisive content and harming vulnerable teens. The name change also may have been a bid to get distance from Facebook's less-than-cool image among young people.
"You won't need a Facebook account to use our other services," CEO Mark Zuckerberg said in introducing the Meta name.
But the Meta name also speaks to Zuckerberg's broader ambitions to lead social networking into the "next frontier."
That frontier will be three-dimensional, allowing for immersive experiences. "The defining quality of the metaverse will be a feeling of presence — like you are right there with another person or in another place," he wrote.
"Our hope is that within the next decade, the metaverse will reach a billion people, host hundreds of billions of dollars of digital commerce, and support jobs for millions of creators and developers."
One more key reason Zuckerberg wants to produce the hardware for that next frontier: He wants to help set the rules, rather than have the likes of Apple set standards.
So, what are the 5 things to note when buying into FB at a discount?
1. Meta (NYSE: FB) is a cash generating GIANT
Meta did report a larger than usual loss, but I personally attribute that to their increased spending in R&D in their Metaverse branch. Yes, losses reported in the AR/VR "Reality Labs" was $3.3 billion USD, but their main ecosystem generated close to $16 billion USD in profits.
When a company invests properly into R&D, they will be sure to incur losses with little to no returns in the short term. However, we can be definitely expect longer-run returns and growth.
2. Meta's user-growth slowdown is EXPECTED
While Meta reported a slowdown in user-growth, I had expected it a long time ago, and am still bullish on the company, and here's why - Take Facebook's user base into consideration.
Facebook already has 3 billion users, while our entire human population is only 7 billion. A slowdown in "growth" and "new users" is bound to happen eventually, and in this case, is nothing to worry about.
3. Mark Zuckerberg has absolute confidence in the stock, even at previous highs of $330
Meta (ticker: FB), formerly Facebook, repurchased a record $19.2 billion of stock in the fourth quarter when the company’s shares averaged about $330.
Meta repurchased a record $44.8 billion of stock in 2021 and the vast bulk of that—some $33 billion—occurred in the second half of the year. Stock repurchases at attractive prices can benefit investors by reducing shares outstanding and lifting earnings per share. The company pays no dividend. The fourth-quarter buybacks amounted to about 2% of the company’s shares outstanding and were a sign that Zuckerberg felt the stock was cheap in the $330s. It will be interesting to see if the company continues its repurchases at such an aggressive pace in the current period at lower prices.
4. In 2022, Facebook has ramped up AND increased budget for Share Buybacks
Facebook continued its aggressive stock buyback program, and in the first 28 days of January, bought back 19 Million shares of stock. This amounts to roughly $7 billion USD in buybacks in 28 days alone. Furthermore, Facebook has announced that they will be increasing their budget for their share buyback program.
These share repurchases are notable because Meta Platforms would presumably have had clear indications during the month that its fourth-quarter results would fall short of Wall Street estimate and that current-quarter guidance would also be below Street projections.
Yet the company was still willing to buy stock at over $300—considerably above the current price of $234, off 1.2% on the session. This means that each share that we as investors hold become that much more valuable the fewer shares there are on the market.
Meta shares fell 26% on Thursday.
5. Facebook has over $165 billion in Assets, and NO long term Debt.
Social-media giant Facebook doesn't have any long-term debt on its books. The business has current assets of more than $165 billion that could easily cover all of its liabilities, which total $40 billion. And its financial position is likely only going to get stronger.
Over the past four quarters, Facebook's free cash flow has totaled more than $24 billion. Its cash position is strong enough that it's been able to repurchase $9 billion worth of shares during that time.
Of the $165 billion, Facebook carries more than $60 billion USD in cash reserves, ready for R&D, Acquisitions, or to for operations. A company with this much cash and no debt, coupled with a strong free-cash flow is definitely rare.
TLDR; Meta Is a Buy at $220, and an even bigger buy if it drops to $180.
With all the reasons presented, Meta is definitely a buy at current levels, and if it crashes even more, we will be opening our wallets even further. Commonly, when investing in R&D Stocks such as biotech or new tech, companies will burn through cash with little to no cash flow for many years until a breakthrough. In this case, investors are able to acquire a cash-cow generating $16 billion USD in profits, with a balance sheet of over $165 billion and no debt, all while holding a piece of the future as FB transitions into the Metaverse and the future of VR/AR technology.
Any way you look at it, Facebook is a buy for us today, and for the next 10 years.