We are long Meta Platform, Inc (FB $181) which is, in our view, a fantastic business that Mr. Market will sell to you for 16X consensus 2022 EPS and ~15X my own estimate, which nets out cash per share.
Bloomberg Consensus EPS (these numbers are a week or two stale):
FY2022 – $12.12
FY2023 – $14.15
We think they will earn more like $13 in 2022 and perhaps $16 in 2023. Net cash is ~$23/share today.
What is Facebook worth? 15X 2021 EPS ($200 today) would provide an investor with a 12-14% IRR based on a 4% current earnings yield plus 8-10% long-term earnings growth. 8-10%? It’s a guess that seems reasonable for a mature advertising business growing at global GDP + operating leverage + accretive capital allocation. We expect medium term returns (3-5 years) to roughly follow earnings growth (15-30%/yr) which should be driven by a combination of rapid top-line growth, neutral to positive operating leverage and share repurchases.
Why is Facebook a fantastic business?
Facebook’s products are daily routines for their 2.6B users. 2.6B people use a Facebook family app daily and habit-driven demand is extremely durable. We recommend reading this book if you have not already. https://www.amazon.com/Power-Habit-What-Life-Business/dp/081298160X
Facebook’s advertising solutions are essential for driving commerce. 200mm businesses have a Facebook presence and 10mm businesses use Facebook advertisements to drive their business by finding new customers.
Facebook financials are excellent. This is self-evident in the numbers, but here are a few. 81% gross margin, 38% EBIT margin and 70% ROIC.
Facebook has untapped growth potential.
WhatsApp. About 2B users and low monetization. $1-10 ARPU is worth $2-20B.
Shopping. We think they are onto something here and they will close the loop on more transactions within IG over time: With Instagram Shopping, we launched a new Shop tab on Instagram in Q4, and this is built on other shopping efforts we’ve had. We see this as an overall part of our commerce efforts. We’ve always been I think a great place for people to discover new products and services. But we are very interested in taking people all the way down that funnel from discovery to purchase to finding products and services, to checking out and as well. And our shopping efforts are part of that.
International. International users are about 9.5X UCAN users, but ARPU is only 5-32% of UCAN levels.
Oculus. The Quest 2 is amazing. Buy one and try it out. Anecdotally, this was a hit over the holidays.
Facebook has great management. Mark Zuckerberg is an animal and he is only 36. We once viewed him as an immature punk, but we have grown to respect him. Admittedly very subjective.
Why is Facebook cheap?
We believe that Facebook is cheap due to a temporary cloud of uncertainty created because humanity is messy and the dreck on social media is a reflection of that mess. Eventually the news cycle will shift and shares will revalue higher or the stock will become so cheap relative to balance sheet cash it will cannibalize itself.
iOS14/IDFA/ATT is another uncertainty I believe is likely to resolve itself over the next year and is factored into management expectations for a very strong 2021. If you are super negative on iOS14/IDFA/ATT, then SHOP is an excellent hedge as Mr. Market is mispricing its exposure to the same potential disruption.
We believe that Section 230 is noise that would be extremely bearish for upstarts and therefor bullish to neutral for incumbents.
Like GDPR, most negative macro changes that increase fixed costs tend to favor large incumbents.