Quality and Value: Are the sceptics wrong about Meta Platforms (NSQ:FB)?
It’s ironic that my first article for Stockopedia is a bullish piece of analysis on Meta Platforms Inc (NSQ:FB). True I am a sucker for a US tech stock - especially one with the type of margins and returns commanded by Meta - but I have also long been sceptical of the company formerly known as Facebook. How can a business which generates its profits by tracking its customers’ behaviour, leaching off their insecurities and exacerbating their bad habits present a good long term investment case?
Those fears have been compounded since Facebook’s visionary/maniacal founder (delete as appropriate) decided to take the company down a route which presents a baffling and frightening picture of the future of mankind. In the coming years are we really going to experience the highs and lows of life from within the artificial environment of the Metaverse? I truly hope not.
But in my quest to kick off my writing career at Stockopedia by presenting the investment case of a high quality company trading on a reasonable price to earnings multiple, I found it almost impossible to avoid Meta. There’s no denying the quality of its revenue, earnings and cash flow, while the problems that have spooked investors in the last few years (waning popularity, an over-reliance on the sharply shifting digital advertising industry and regulation pressure) have left it with a forward price to earnings ratio of 14.8x - below its five year average of 26.9x.
Indeed, even after the leap which followed a surprisingly upbeat first quarter results announcement, shares are still trading at levels last seen in mid-2019. Since then the company’s earnings have risen by over 80% and its sales have more than doubled.
Quality fundamentals
Let’s dig further into the important fundamentals of Meta, starting with its recent performance. In the year to December 2021, the company recorded operating profits of $46,753m off sales of $117,929m - equivalent to an operating profit margin of 39.6%. Net profits were $39,370m, or a net profit margin of 33.4%. Those results continued the strong growth trajectory of the last few years, shown in the table below.
| 2017 | 2018 | 2019 | 2020 | 2021 | |
|---|---|---|---|---|---|
| Revenue ($m) | 40,653 | 55,838 | 70,697 | 85,965 | 117,929 |
| Operating Profit ($m) | 20,203 | 24,913 | 23,986 | 32,671 | 46,753 |
| EPS ($) | 6.16 | 7.57 | 6.43 | 10.1 | 13.8 |
We can also use the financial health checklist developed by financial academic, Joseph Piotroski, to assess whether the company's fundamentals are improving. Meta passes 8 of the nine Piotroski F-Score criteria, as demonstrated in the following table.
| Piotroski's Rules | Meta Platforms Inc's metrics |
|---|---|
| Is the company making a profit? | ROA: 24.7% |
| Is the company generating cash? | CFROA: 36.2% |
| Is it making more cash than it is generating in profits? | CFROA: 36.2% > ROA: 24.7% |
| Is it more profitable than it was last year? | ROA last year: 24.7% ROA prior year: 21.9% |
| Is the long term debt reducing or stable? | TA/E last year: 0.31% TA/E prior year: 0.32% |
| Is it increasing its ability to pay short term debts? | CR last year: 3.15 CR prior year: 5.05 |
| Is it trading without having to raise funds from shareholders? | Market Cap: $509bn Equity Dilution Funding Last Year: -44,537 |
| Improving pricing power or lowered costs | GM last year: 80.8% |
| Is it more productive than last year? | Asset Turnover last year: 0.54 Asset Turnover prior year: 0.71 |
But it is not Meta’s historic performance which spooked investors at the start of 2022, it is the current trajectory of key metrics. In the first quarter of the 2022 financial year - results of which were announced last night - Meta reported diluted earnings per share of $2.72, 18% below the $3.30 reported in the same period last year. Revenue at $27,908m came just under the company’s own forecasts, with management pointing to the war in Ukraine as one of the reasons for continued weakness in advertising demand.
But the main dent in profits came as a result of a massive spike in spending on research and development - $7,707m compared to $5,197m in the first quarter of 2021. The continued high investment costs - which are being consumed predominately by the so-called Reality Labs - will continue for the rest of the year. Earnings per share are forecast at $12.3 and $14.3 respectively in the next two years, compared to $13.8 reported in the 2021 financial year.
Quality at a discounted price
Despite these disappointing forecasts, there is still a lot to like about the fundamental investment case. Return on capital employed (ROCE) has averaged 25.6% over the last five years while its long term average is 24.6%. This indicates that the company has a strong track record for making efficient and productive use of its capital - a positive sign for long term growth.
But the profits reported on a company's income statement are not the end of the story. Successful companies are highly efficient in generating cash from their profits. While this is one of the criteria assessed by the Piotroski F-Score, we will now dig down into cash conversion further.
Meta generated $39,116m of free cash flow in the last twelve months, compared to $39,370m of net profit, showing that it is highly cash generative. The company's cash flow return on assets was 36.2% while its cash flow to revenue ratio was 33.2%.
Now let's turn to Meta's valuation. The company's shares are currently trading on 14.8x forecast earnings, which is below its five year historic average of 26.9x. This suggests that Meta's current valuation compares favourably to its history.
It is also worth assessing how the company is performing relative to its peers. In the last year, the share price trajectory was -40.3% while the relative strength compared to its benchmark was -40.1%.
It is right to question why the stock has sold off so much - investors do not ditch one the decade’s most dominant US tech stocks on a whim. Indeed, it is not just the short-term earnings blip which is impacting sentiment. In February, the company reported a decline in its total number of users for the first time in its history, sparking concerns that the pervasiveness of advertising - a sharp contrast to Facebook’s origins as a simple social platform - had deterred users for good.
Some of those fears have been slightly allayed by a return to user growth reported in the first quarter of this year, but there is no denying that the suite of platforms under the Meta banner - including Instagram and Whatsapp - continue to come in for their fair share of criticism from users. Alienating the audience who are key to attracting the advertising dollars is a dangerous thing to do.
Meanwhile, fears lie in the amount Meta is investing in the Metaverse - it’s not just a name change, the company is reported to be spending $10bn this year, equivalent to almost a third of its forecast profit. That’s a big bet for an unproven concept.
Ignore the fears and take the plunge?
One of Stockopedia’s key mantras is the value of silencing one’s individual investment demons and following the facts. Meta has a QV (Quality Value) ranking of 89 (out of a possible 100) which indicates that its quality and value scores combined are currently among the top 20% of companies in its market. And last night’s earnings announcement has helped allay some of the recent fears about the direction the company is heading. But the inner investment demon which haunts my views on Meta has the shadow of Mark Zuckerberg and that is enough to keep me on the fence.
Disclaimer
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30 comments
Thanks for the reply. And for the tip on AMTX - I'll investigate further. Good luck in your endeavours
@BnB, I’ve not ‘replied’ as the thinning text is getting difficult to read :-)
To call a truce I will also apologise for my misrepresentation of your investment style and my sometimes frosty demeanour. I also hope to see greater coverage of US stocks by the Stockopedia analysts.
The assignment of relative risk to a given stock is however, arbitrary imo; as buying at the ‘wrong’ price can leave investors new and old underwater for some time irrespective of the perceived security of investing in a large cap growthy company.
Anyone buying some of the names you’ve mentioned this year for example would likely be concerned. It could be argued that many of the FANGMAN stocks are risky too: many are in competition with each other, there is regulatory risk, expectations of p/e contraction in an environment of rising rates in the US economy, so who knows where the sp’s will go?
I’m pleased that we have found some common ground on the merits of ACLS and as a growth investor I’d urge you to take a closer look at AMTX.
The structural trend, particularly in California, is for decarbonisation and replacement of existing fuels. I don’t see this changing there anytime soon. The California Low Carbon Fuel Standard and Federal RFS programs appear to underwrite future sales growth, particularly via the D3RIN category which is currently rare. The company has also secured government grants to develop their production plants. Sales / off-take agreements are increasing rapidly in the Jet Fuel market and new pipeline connections for their RNG are increasing sales potential too. The current price to sales ratio is now back at a reasonable level after it became skewed when the sp got well ahead of itself over recent years (I first bought at the $3 area and flagged it on this platform at the time). From a technical perspective, there are signs of accumulation at the $8-$9 area, I remain happy to hold and add at this level having previously sold into the massive spike seen on the charts. I did state this investment opportunity should be viewed on a 10yr outlook in my original post and stand by that assertion.
Cheers, Forbsy.
I don't think this is an imminent risk for AMTX given the USA's superior agronomy but Germany has today floated (not yet instigated) a policy of banning biofuel production on the grounds that food is in short supply since the Ukraine escalation. I know you see political tailwinds for the name - and I see them too - but this is the type of sudden political reversal I would be wary of. Shares in Verbio down 25% as I type.
Yes good to see an article on US stocks. Is this a new feature on Stockopedia? Are you part of the Stockopedia team?
Not really interesting Meta myself. But I would welcome some coverage on other US tech stocks, such as AMAT, AMD, ACLS, ADBE, SHOP and TTD or any others.
@Rustbucket - I am pretty bullish on the outlook for $ACLS - Axcelis Technologies, I sold out into the spike earlier this year as I think the sp had become extended but have re-entered over the last week. The bull case is unchanged, the drive to reshore supply chains in Europe and the US against a backdrop of a global semi conductor shortage should position the company well. Their Purion implantation systems are very much in demand just now and are pushing towards if not already at market leadership position. The balance sheet is very solid, no debt, they are consistently profitable and have recently announced a buy back scheme which should see the sp supported even as the Nasdaq crashes. With a mcap of around $1.5billion it’s in US small cap territory too, so plenty room to grow. One to hold for the long term imo.
Would love to hear anyone else’s thoughts or a counter argument in case I’m missing something…
Thanks, Forsby. I’m just starting to build some positions in US stocks mostly tech but would like to diversify as well. Some are well down but I’m wary of the market falling more.
My highest conviction US positions for the long term - ie 10 yr outlook - are ACLS and AMTX, I’ve traded in and out of both on the volatility but will be looking to build on my existing positions as and when I can. I know TA is not for everyone but I use it to find good entries and exits; with AMTX it’s also just re entered my buy price level around the 8-9$ area. If this level holds I’d expect it to kick on again as the chart shows signs of accumulation at this level.
Worth some DYOR’ing also.
Those are two interesting companies with above average risk. And very small indeed. Given the choice of one of the world’s largest companies for a first visit to the USA, I rather think the author (and her readers) are more likely to stick with large caps and proven long term winners. Though tempted by MSFT or Alphabet, I would suggest SPGI as offering pretty much the highest quality investment case in the S&P500.
Everyone has their own investment strategy, I make no recommendations to buy. I initially responded to @Rustbucket who asked about ACLS. Risk is what you make of it, even the largest cap companies on the planet that can be considered ‘low risk’ can go bust! I wonder how SPGI would fare if there was another financial crisis?
Enron was considered a safe investment. So risk is a perception, risk management is actionable.
I wonder how SPGI would fare if there was another financial crisis?
I would expect many of its services to be in great demand even if the share price would tank along with the rest of the market. The appeal of the name lies in its incredible historical performance, which is derived from the oligopolistic, technical and network moats and the spectacular operating numbers (ROCE, margins etc) that match even the most profitable software giants.
I like ACLS by the way. Plenty of lower risk semi names, like TSMC* and larger capital equipment makers such as TER, offer similar GARP- y valuations, operating leverage and expectations. Of course all are vulnerable to the peaks and troughs of the semi cycle, which we can see in recent pullbacks.
* It is my opinion that the sanctions response to Russia/Ukraine has materially de-risked the investment case for TSMC. I think China will play a much longer game.
Your superior, condescending attitude throughout this discussion board is very much a turn off. AMTX effectively have their growth underwritten by the state Government of California, which would have GDP equivalent to the fifth largest economy in the world.
Well done to you for having made a lot of money in life , I understand that preserving that capital is your primary aim. For others who are likely earlier in their life journey than you are, well researched US small caps offer the potential for outsized gains.
For ‘large cap semis’ far easier to hold £SMGB as part of a portfolio, such as I do.
I understand that preserving that capital is your primary aim
I hold only equities, no bonds, am 100% invested and in growth stocks only, of which nearly 50% are small or mid-cap. Does that sound like a capital preservation strategy to you?
I’m sorry you don’t like my posts. Perhaps you should just ignore them in future.
Cherry picking again, I will indeed ignore you except where you respond negatively to my posts.
This isn’t a negative post but you’re welcome to reply. I’m puzzled that you accuse me of cherry-picking. I simply replied to the personal attack, which I shall not reciprocate, addressing the demonstrable misapprehension over my investing style. I’d be happy to engage with you over both of the names you champion. And likewise over my personal choices.
To return to my original comment, it was editorial rather dismissive of the potential opportunity in AMTX and ACLS, based on the assumption that if Stocko is to bring more US stocks into its editorial coverage, then it would be reasonable to expect the focus to start with well-established names for their broad appeal to the membership, and on well-covered companies for practical reasons of assimilating multiple views, reducing reputational risk for the writer. This particularly given the wide choice of high quality growthy large caps across sectors from MSFT to UNH to GOOG and even SPGI.
If I came across badly then I apologise for hasty and ill-conceived wording. Good luck with AMTX. there are clear risks (leverage, negative cash flows, lack of profitability, political reversal) and opportunities (megatrends, political support, oil price), which you’ll understand well and ACLS looks a good bet when the semi cycle turns up again.
https://www.stockopedia.com/co...
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For those interested in Stockopedia's comparison of the companies mentioned see the links above.
Yes good to see an article on US stocks. Is this a new feature on Stockopedia? Are you part of the Stockopedia team?
Not really interesting Meta myself. I would welcome some coverage on other US tech stocks, such as AMAT, ACLX, SHOP, TTD.
a great and thought provoking article on a company I didn’t know much about. Thanks for this. I don’t get the opening sentence about irony though, what is the irony?
“It’s ironic that my first article for Stockopedia is a bullish piece of analysis on Meta Platforms Inc (NSQ:FB). True I am a sucker for a US tech stock”
Megan, I'm pleased to see you here. I've missed reading your articles in the IC.
Without doubt the metaverse will eventually become a ubiquitous part of human life. The boundaries between physical and virtual will become, over time, increasingly synchronised and blurred, it will touch every part of our lives at home and at work, whether we want to interact with it or not.
The children of today will, as they progress into adulthood, see this virtual world as part and parcel of their everyday existence. The more you contemplate what a metaverse can achieve beyond the superficial elements of social media and entertainment is staggering.
The only real question is when, and will Meta become dominant in this space, I think it will (I do not hold - yet)
The only way the metaverse makes sense is from a business point of view, socially we'll all want to get together and experience life as we have for thousand of years. It makes sense from a business point of view to make the transition as it essentially takes the physical necessity of building a project, whether it is an small part for a machine i.e. car or a house development, i.e. architectural development. Once the transition is made, this will be heavily deflationary, as a lot of the physical things we needed in the past won't be needed anymore, and business travel will be nonexistent, apart from the few exceptions (this has already been pushed by the pandemic with the rise of Zoom meetings, and Microsoft Teams).
But it needs to emphasized, that the technology for video calling was already there, it existed for years before the pandemic and its business meeting implementation. One can make the argument that it was only a matter of time, and the pandemic only brought that time to the present essentially.
The Metaverse is in its conceptual phase, it's not even an actual product/service/platform. Whereas like the Zoom business meetings, it's only a matter of time until VR becomes a part of our life, I don't know if the technology is there yet, and we are still to be proven that it is. Which makes all of this a very speculative venture, and I feel that this is reflected in the sellout and consequently the market price.
Is hard to deny it's quality, the revenue growth and profits are impressive, the numbers speak for themselves, but the risk the shareholders take in owning this company has changed. It's business model it's changing, this is not what people got into Facebook for, they got into it for its dominance as a social media platform and its potential for reaching the deepest desires of it's users in order to push products and sell ads. It's managed to done this in an exceptional manner, but as others have mentioned on here, this came at a cost, having a severe impact on the mental health of people, especially teenagers. The reputation of the company is not what it once was and for good reason.
They are also losing the grip in tracking its users in order to sell adds. This is plainly seen by Apple giving the users the option of choosing whether an app can track you or not, which is a direct threat towards Facebook's current business model. This is partly the reason why Zuckerberg is doing the move, he wants more autonomy, a platform like the App Store, where he makes the rules and calls the shots.
The other side of the coin is that the app is under threat from competition i.e. TikTok and other platforms that will appear over time eroding market share. They got a large moat regardless, having 40% of the whole population on your platform is incredible, and just wrapping my head around it's still seems quite unbelievable, that's why I don't find news like declining user growth concerning, I mean considering the track record this is nothing, a mere drop in the ocean. but Zuckerberg is aware that his run will come to an end if he doesn't reinvent himself and his company. Whether he has the technology, whether he does this successfully, whether it is the right time, that remains to be seen. If you do believe in its potential and that he can achieve it this could be the time to get in, it does provide the opportunity for an entry subject to your valuation.
Welcome and thanks. Have an IKBR account which has low spread, liquidity and no FX fees so US of interest.
Try to avoid over $100 companies (cost plus apparently elephants can't run - must stop reading history books).
Alphabet $GOOGLE $SNAP BIDU and TWTR are competitors I think - but are they? so a strong moat maybe. Not a user so don't know good/bad but see the ability of the platform to bring people together for hopefully the common good and give information not otherwise available on our rubbish TV.
On the F-score tend not to dip in below 6 thanks to Mr Head, but sometimes broken :).
In my opinion FB is in decline. Hardly anyone I know uses it regularly and I only use it for announcements from clubs and societies.
Having said that FB could be offering an entry point for traders. See chart.
Yeah, maybe a short entry when it closes below that demand line :-)
more on US stocks please.
Thank you for a very well written article. My view is that regulatory changes could have a big effect on the future of the company. The future regulatory environment is very unpredictable & is likely to end up being very different in different parts of the world. I don't know well, or how badly, the company scores on ESG measures, but it could be argued that some of the companies practices are immoral, and that it has a detrimental effect on the well being of some of its users.
NSQ:FB
Bargepole. As long as possible.
My inbox is continually clogged with new friends Facebook tells me to contact. Smacks of desperation. I think social media is responsible for a great deal of the mental health problems we see today. As the Sackler family found selling drugs can be very profitable until the backlash arrives. The twenty first century version of cigarette manufacturers.
Up 17% in the pre-market!
I hold and will probably sell some. Been in and out already, buying back on recent drop.
All the reasons you have stated mean that if my trade goes wrong the value metrics justify holding for longer.
Big tech is here to stay. The transaction values are higher than certain countries. I have heard it said that FANGMAN are safer than bonds. Sure most of them got ahead of their value over the last 5-10 years, so when accounting fundamentals justify purchase, prejudices need to be left aside.
Articles like this are important.
Interesting and thought provoking article. Keep them coming, please. I do hold a small stake in FB, so far showing a small loss.
The money being spent currently in the infancy of the metaverse is quite frankly insane. If it reaches a fraction of the eventual market size predicted, it will be a vast sector in it's own right, full of opportunity and expansion. Meta/Facebook are one of the finest companies of all time in generating advertising capital, of which surely they plan to continue in the virtual world. I struggle to see how todays discounted price can generate anything other than a healthy return in the long term. Sometimes, we have to trust the visionaries when a lack of clarity and understanding would otherwise leave us on the fence.
It is great to see a Stockopedia article focusing on a non-uk stock, thank you - although I am not tempted by FB for the same reasons as you.