A closer look: Meta Platforms (META)
Oct 5, 2022
Holding Name: Meta Platforms (META)
Strategy: Flagship
Percent weighting of strategy: ~2.4%
TLDR: After a decade of explosive growth, Meta CEO Mark Zuckerberg announced plans last week to freeze hiring and restructure some groups within the company. In a world where tech companies have historically pursued growth at all costs, the move signals that the social media giant is prioritizing a strong balance sheet amidst macro uncertainty. The decision, in our eyes, may save the company anywhere from $2 billion - $8 billion.
Business overview: Meta Platforms, Inc. develops products that enable people to connect and share with friends and family. It operates in two primary business segments, Family of Apps and Reality Labs.
The Family of Apps segment's products include Facebook, which enables people to share, discover, and connect with interests; Instagram, a community for sharing photos, videos, and private messages, as well as feed, stories, reels, video, and live; Messenger, a messaging application for people to connect with friends, family, groups, and businesses across platforms and devices through chat, audio and video calls, and rooms; and WhatsApp, a messaging application that is used by people and businesses to communicate and transact privately.
The Reality Labs segment provides augmented and virtual reality related products comprising virtual reality hardware, software, and content that help people feel connected, anytime, and anywhere.
Why we own it: Meta Platforms, formally known as Facebook, is an unparalleled digital asset with global scale, a massive user base, and significant user base. The Facebook app itself has 2.0B+ daily active users and the company’s family of apps has 2.9B+ daily active users.
We believe the company has a long runway for revenue growth as it ramps monetization of the core Facebook app (ad conversion improvements), Instagram (Reels), WhatsApp and Messenger.
In our opinion, the network effect of Meta’s key assets and strong management team provides defensibility over the long term. The company’s scale and R&D prowess should enable it to stay ahead of the pack and navigate competitive threats.
Their large user base allows the company to scale additional products to grow top line revenue at an impressive rate. For example, Click-to-Messaging-Ads was launched in August of 2018 and now a multi-billion revenue generating business, growing double-digits year over year.
What’s the latest: After a decade of explosive growth, Meta CEO Mark Zuckerberg announced plans last week to freeze hiring and restructure some groups within the company. While many of the world’s largest technology firms are pulling back spending in the face of a worsening global economic outlook, Meta is also grappling with threats to its advertising business, i.) from iOS privacy changes implemented by Apple last year and ii.) TikTok.
The hiring freeze could save anywhere from $2bn to $8bn from our estimates, which signals to investors that they are prioritizing a strong balance sheet amidst macro uncertainty.
Although the company continues to face notable headwinds from the macro environment, Meta has shown resilience in combating TikTok through innovation and tactical investment. Instagram Reels was created as a means to compete with TikTok and the annual-recurring-revenue run rate is higher than Instagram Stories at the identical time post product launch.
The company has been forced to innovate around issues revolving measurement as a result of the iOS privacy changes. Measuring advertising performance involves tracking ad campaigns to see if the advertisements are running as expected and the media platforms are delivering to the projected audience. We believe that if any company will effectively combat measurement issues, it will be Meta given its enormous amounts of data and heavy investment in AI-driven rankings. We believe this could drive massive returns to scale relatively vs. other social media platforms.
Sign posts moving forward: Moving forward, our team will be closely monitoring the impacts of measurability and their ability to innovate around new regulations. Furthermore, we will be looking at reels engagement, revenue and margin trends following the layoffs and continued capital expenditures for the metaverse R&D.
The content contained in this material is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, solicitation of an offer, or investment advice.