Meta Platforms Hasn't Solved The Problems

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Facebook Parent Company Meta Reports Strong Quarterly Earnings

Justin Sullivan

Meta Platforms (NASDAQ:META) has rocketed up from its 52-week highs and is presently astatine much than double its lows. The institution is now astatine an almost $500 cardinal marketplace capitalization. However, it still has structural issues done its attraction on nan metaverse and accrued title pinch privateness changes. As a result, we expect nan institution will underperform.

Meta Platforms Revenue

Meta Platforms has continued to make important gross alleviating immoderate fears astir nan business.

Meta Platforms Investor Presentation

Meta Platforms Investor Presentation

Meta Platforms Revenue - Meta Platforms Investor Presentation

The institution achieved beardown gross successful 4Q 2022, contempt a YoY decline, pinch nan company's Rest of World conception showing respectable maturation and its US & Canada halfway conception maintaining important resiliency. However, it was nan 3rd 4th successful a statement without nan institution managing to execute YoY growth, which is successful of itself a awesome statement.

This could beryllium a motion of a slow move distant of customers. Similar to server processors arsenic Intel slow bled barren to AMD, advertizing customers are reluctant to switch-up until nan alternatives person been thoroughly proven.

Meta Platforms Expenses

At nan aforesaid time, nan company's expenses person skyrocketed and show nary motion of abating.

Meta Platforms Investor Presentation

Meta Platforms Investor Presentation

Meta Platforms Expenses - Meta Platforms Investor Presentation

The company's expenses person grown from 56% of gross successful 4Q 2020 to 80% successful 4Q 2022. That's a important increase, chiefly from nan company's trading & income which skyrocketed successful early 2022 on pinch a emergence successful expenses crossed nan board. With nan company's gross maturation stagnating (1Q 2023 forecasts are successful statement pinch 1Q 2022) we don't spot this going down.

The company's full 2022 expenses were conscionable nether $88 billion. The company's anticipated 2023 expenses are expected to beryllium $92 billion, representing astir 5% YoY maturation successful expenses. A important information of nan company's disbursal maturation is continued monolithic R&D expenditures connected nan metaverse. The institution is continuing to walk massively connected capex arsenic well.

Meta Platforms Active Users

META banal has continued to support a agleam spot successful its portfolio pinch maturation successful its family of apps.

Meta Platforms Investor Presentation

Meta Platforms Investor Presentation

Meta Platforms Active Users - Meta Platforms Investor Presentation

The company's 4Q 2022 progressive users accrued by 0.1% QoQ successful statement pinch nan company's anterior quarterly increases. The institution hasn't seen existent important maturation since YE 2020, astatine nan commencement of nan pandemic. Still successful a saturated marketplace pinch galore competing platforms, nan expertise for nan institution to support minimal maturation is awesome to see.

Meta Platforms FCF

Unfortunately for nan company, it's a monolithic company, and simply earning gross isn't worthy it anymore. It needs tens of billions successful yearly rate travel to warrant its valuation.

Meta Platforms Investor Presentation

Meta Platforms Investor Presentation

Meta Platforms FCF - Meta Platforms Investor Presentation

In our view, nan institution needs ~$35 cardinal successful yearly FCF to warrant its coming valuation. In 2022, nan institution earned $18.5 cardinal successful FCF aliases astir half this number. In 2021, nan institution earned $35 cardinal successful FCF. That was capable rate flow, but intelligibly nan company's 50% YoY diminution successful FCF doesn't warrant its valuation.

The mobility for nan institution remains whether it tin gain capable rate from its halfway business to make nan rate travel to warrant its valuation. At nan existent time, pinch its monolithic spending connected projects that mightiness not cookware out, whether nan institution tin do that remains to beryllium seen.

Meta Platforms Problem

Meta Platforms has respective halfway problems that it needs to activity connected solving to warrant its valuation.

The first is advertizing directness. The institution already mislaid important advertizing spot pinch customers pinch Apple's privateness updates. Amazon, pinch its expertise to show you straight what a customer is looking to buy, has been taking some Facebook and Google's luncheon money. We expect that those problems will proceed starring to a much fragmented advertizing market.

As a portion of this is nan privateness changes for nan company. The spot of an advertiser and nan returns that they gain (and thereby really overmuch they're consenting to pay) is based connected their expertise to deed nan customers willing successful buying their products. As Apple, 1 of Facebook's largest sources of users, continues its privateness attraction that could get harder and harder.

Apple, has nary inducement and only costs successful helping Facebook execute its goals.

Last is "metaverse flopverse". Meta Platforms has decided nan metaverse is nan adjacent large point and past it has decided it needs to walk tens of billions proving it's nan adjacent large thing. It made some of those decisions without really having nan grounds (which it still doesn't) that nan metaverse will ever gain capable to warrant its valuation.

That's dramatically wounded nan company's FCF and it has yet to show an inclination to hole that.

Thesis Risk

The largest consequence to our thesis is that Facebook's halfway business generates monolithic rate flow. The company's 2021 FCF based connected its existent marketplace capitalization was successful nan double-digits. If nan institution scales backmost its metaverse losses and attraction connected its halfway business it could quickly make important shareholder returns.


Meta Platforms has had an incredibly beardown betterment since nan financial lows that nan institution hit. That betterment has pushed its marketplace headdress backmost up towards $500 billion, though it's still obscurity adjacent nan company's highest of a marketplace capitalization of conscionable complete $1 trillion. Unfortunately for nan company, we spot nan betterment arsenic much of a dead-cat bounce.

The company's FCF is still obscurity adjacent precocious capable to warrant its valuation. It continues to person important problems pinch Apple's privateness changes on pinch its continued important metaverse expenses. That put pressures connected some nan company's net and expenses, a double whammy that hurts its FCF. Overall, we urge against investing successful Meta Platforms astatine this time.

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