Is Meta stock a buy?

Thank you, everyone, for joining us today. I'm Gagan Sandhu, co-founder and CEO of Xillion, a platform designed to help you multiply your money and achieve financial freedom sooner. Joining me is Chandan, my co-host.

Hello, friends. I'm Chandan, co-founder of SEC Diver and an engineer by profession. SEC Diver is your go-to solution for conducting fundamental analysis of stocks. If you're interested in understanding whether a stock is a good investment, I highly encourage you to check it out. I frequently use SEC Diver for its detailed analysis.

Today, we're going to discuss Meta as a stock option whether it's a good buy or hold, and what the future might hold for it. Feel free to ask any questions either now or later in the comments, and Chandan and I will be happy to answer them.

Let me share a bit about Xillion. We believe in seven steps to achieving financial freedom: increasing earnings, saving a significant portion of those earnings, investing in appreciating assets like stocks or real estate, spending wisely after saving and investing, borrowing judiciously, planning professionally, and protecting your accumulated wealth. Xillion offers a variety of tools to assist you in these areas, from 401(k) optimization to budget tracking, investment guidance, and more.

We've developed an algorithm to identify growth stocks with bright futures and have patented the Money Score, a comprehensive measure of your financial health, distinct from the traditional credit score. In addition to these tools, we provide mentorship and support to answer any financial questions you might have.

Our goal at Xillion is to enable you to manage all your finances in less than 10 minutes a week, understanding that you have other important commitments. Now, I'll turn it over to Chandan to delve deeper into our discussion on Meta.

Let's discuss Meta, formerly known as Facebook. Meta is ubiquitous, encompassing Facebook, Instagram, and WhatsApp, and is a significant presence in our daily lives. We're analyzing Meta's impressive revenue growth since its inception. Currently, Meta generates over $100 billion in annual revenue. Despite being an $800 billion enterprise, it's still growing at a healthy rate of 23% in the last quarter, which is remarkable.

However, it's important to note that Meta faced challenges last year. There was a noticeable decline in revenue during Q1 and Q2, influenced by the economic contraction in the U.S. and inflation. Despite these challenges, Meta regained its momentum, achieving a 23% growth rate at $120 billion in revenue, which is quite impressive. The question we're examining is whether this growth is sustainable.

In the next few slides, we'll delve deeper into this. It's worth noting that 2021 was an exceptional year for tech companies, marked by high growth. However, sustaining these revenues and continuing to grow is a testament to the strength of Meta's network.

I must disclose that I purchased Meta (then Facebook) at its IPO in 2012 and sold it in 2017 due to concerns about the election fiasco and privacy issues. One concern during that time was the slowing growth rate. Excluding the COVID-19 pandemic, there was a steady decline in growth, even with the acquisitions of Instagram and WhatsApp. Additionally, Apple's privacy changes impacted Meta.

So, let's examine Meta's valuation. Chandan, I know this slide comparing price to sales ratios is a favorite of yours. This ratio is a useful metric to gauge a company's standing compared to its peers. Most tech companies are valued at 5 to 10 times their price-to-sales ratio. Meta is currently trading at a seven multiple. However, in late 2022, it was much cheaper, trading at less than a three multiple, an opportune time for investment.

In late 2021, Meta's market cap dropped significantly, making it a great buying opportunity. Since then, there has been a substantial recovery in its stock price. To clarify, the price-to-sales ratio represents the market capitalization divided by annual revenue. Each dollar of Meta's revenue is currently valued at approximately $7 in market terms. Comparatively, Google and Netflix have similar ratios, with most tech companies falling within the 5 to 10 range. But, as Chandan mentioned, Meta's ratio dropped significantly last year, presenting a prime opportunity for investment.

In this segment, we'll delve into Meta, previously known as Facebook. Meta is an integral part of our lives, encompassing Facebook, Instagram, and WhatsApp. Let's explore Meta's remarkable revenue growth since its inception. Currently, Meta generates over $100 billion annually. Despite being a colossal $800 billion enterprise, it continues to grow at a healthy 23% rate in the last quarter.

It's crucial to remember that Meta faced challenges last year, with noticeable revenue declines in Q1 and Q2 due to the U.S. economic downturn and inflation. However, Meta has since regained its momentum, achieving 23% growth at $120 billion in revenue.

Next, we have one of my favorite charts: the price to operating cash flow. This chart measures the profits a business makes and the price multiple paid by investors. In 2022, Meta, being a high-growth company, had a high price-to-operating-cash-flow ratio, always above 20 or 30. However, during 2022, it fell to less than 10, presenting an excellent buying opportunity.

Operating cash flow is a key metric. Despite significant investments in servers and construction, Meta has consistently generated substantial operating cash flow. In 2021, Meta's profits were around $57 billion. This figure, even when excluding the COVID-19 impact, indicates Meta's strength as a cash-generating machine.

Meta enjoys a virtual monopoly with a huge user base. They have nearly 4 billion users across their platforms, almost equaling the number of smartphone users worldwide. This dominance allows them to effectively increase ad prices. Meta's ad targeting is highly effective, especially for small businesses, which speaks volumes about the company's scale and knowledge of its users.

Despite challenges like Apple's privacy changes, Meta has maintained its ad revenue strength. This resilience is a testament to their robust business model. An emerging factor is WhatsApp's potential as a business tool, especially in developing countries. However, monetizing this segment, often from lower socioeconomic backgrounds, remains a challenge.

Finally, the social media market is saturated. Facebook's popularity surged in 2004, and since then, the landscape has evolved significantly. This historical context underscores the challenges and opportunities facing Meta today.

I remember when Facebook first introduced the news feed. There was significant customer backlash, with many viewing it as a privacy violation. However, Meta, a 20-year-old company, now essentially dominates the market. There's little new market territory for Meta to explore. Unlike Apple, which benefits as people's socioeconomic status improves and they desire higher-end products like Apple phones, Meta faces a different challenge. If someone wants to use Facebook, they likely already have it, along with WhatsApp and Instagram.

Facebook's primary revenue stream is advertising, which means any emergence of a new social network or changes in social media advertising could significantly impact Facebook. We saw this when TikTok rose to prominence, though certain legal and regulatory issues in the U.S. bought Facebook some time to develop alternatives like Instagram Reels.

Aside from their primary platforms, Facebook has tried other ventures like Facebook Marketplace, which shows promise, especially as a potential successor to platforms like Craigslist. However, monetization has been a challenge. Their attempt at entering the financial sector with Libra didn't take off and was eventually shut down.

Their recent e-commerce partnership with Amazon might be promising, offering both companies benefits in terms of advertising and reach. This partnership aims to keep users on Facebook or Instagram for their shopping needs, which could be significant. However, balancing this relationship is crucial, as Amazon is a dominant player in online shopping and advertising.

The ad business is incredibly lucrative, with high margins, unlike the slim margins in e-commerce. So, while these new ventures offer incremental opportunities, they might not match the profitability of Meta's ad business.

The current state of Meta also reflects broader tech industry trends, with many companies, including Meta, experiencing turmoil, frequent reorganizations, and a lack of clear direction. Mark Zuckerberg has emphasized a more efficient and lean approach, but the company faces challenges in maintaining morale and direction amid these changes. Despite this, Meta has recently shown signs of hiring again, indicating a potential resurgence in their market position.

In summary, while Meta faces challenges in diversifying its revenue streams and navigating a saturated market, its dominant position and ongoing initiatives could help it maintain its influence in the tech industry.

In this discussion, we're examining how great companies and leaders set a clear direction, a 'true north,' enabling their teams to align and achieve remarkable things. Currently, there seems to be some uncertainty within Meta, especially regarding the direction of the metaverse. Despite Mark Zuckerberg's significant investment in this area, including changing the company name and ticker symbol, there appears to be a disconnect with employees. If the workforce isn't aligned with this vision, it raises questions about the project's success.

Mark Zuckerberg is both a potential headwind and tailwind for Meta, depending on how his bets play out. His leadership has been successful so far, but the rise of competitors like TikTok, which rapidly scaled and captured significant market share, poses a challenge. The agility of internet companies means that new competitors can emerge and scale swiftly, which is what TikTok demonstrated.

Despite having a vast user base, with 3.96 billion of the 4.3 billion smartphone users worldwide using Meta's services, the remaining potential users are not as lucrative. This saturation presents a significant challenge for Meta, as the room for growth in user base is limited.

Chandan, you mentioned the average revenue per user (ARPU), highlighting the disparity between different regions. In the U.S. and Canada, Meta's ARPU is significantly higher compared to other parts of the world. This disparity underscores the challenges Meta faces in monetizing its user base in less developed regions.

Regarding the metaverse, it's currently a significant investment for Meta, costing billions annually. The company's push towards the metaverse seems driven by the desire to own the next major operating system, having missed the mobile revolution. However, whether this will resonate with the general public and become as integrated into daily life as current Meta platforms remains to be seen. As someone knowledgeable about technology and user behavior, I have my reservations about the widespread adoption of AR/VR technologies like Oculus in their current form.

In our discussion about Meta, it's clear that great companies and leaders set a clear direction, a 'true north,' for their teams to follow. However, within Meta, there seems to be uncertainty, especially regarding the direction of the metaverse. Even though Mark Zuckerberg has invested heavily in this area, changing the company's name and focus, employees seem misaligned with this vision. If the workforce isn't on board, it raises questions about the project's success.

Mark Zuckerberg's leadership has been successful so far, but Meta faces challenges from competitors like TikTok. The agility of internet companies means new competitors can emerge and scale swiftly, as TikTok has shown.

Meta's vast user base, with 3.96 billion of the 4.3 billion smartphone users worldwide using its services, shows limited room for growth. Most potential new users are in less lucrative markets, presenting a significant challenge for Meta.

The average revenue per user (ARPU) highlights the disparity in earnings across regions. In the U.S. and Canada, Meta earns significantly more per user compared to other parts of the world. This disparity underlines the challenges Meta faces in monetizing its global user base.

Regarding the metaverse, it's a significant investment for Meta, costing billions annually. The push towards the metaverse seems driven by the desire to own the next major operating system, having missed out on the mobile revolution. However, widespread adoption of AR/VR technologies like Oculus remains uncertain.

Meta's investment in the metaverse is seen as a risky bet with not many practical applications currently. The company needs to justify these investments to its shareholders, especially since Zuckerberg holds significant voting rights, which can sometimes leave shareholders feeling their voices are not heard.

The future of the metaverse is uncertain, and its success depends on finding practical applications and user adoption. The high investment costs and the novelty factor wearing off for VR headset users are challenges that Meta needs to address. The company must find a way to make the metaverse as integral to daily life as its current platforms, or it risks the project becoming a costly experiment.

In summary, while Meta's leadership and innovative drive are commendable, the company faces challenges in maintaining growth, diversifying revenue streams, and navigating the complex landscape of emerging technologies like the metaverse.

In this discussion, we're exploring the potential floor and upside of Meta's valuation, considering various scenarios. Currently, Meta's price-to-earnings ratio of 29 indicates optimism among some investors that the company might reduce its $10 billion annual spend, potentially aligning its ratio closer to the S&P 500 average.

In an optimistic scenario, if Meta dominates the metaverse, continues cost-cutting, and makes strategic acquisitions, its valuation could rise significantly, possibly exceeding $1.4 trillion in the next few years. Meta has a track record of successful acquisitions and is a leading AI player, collaborating with companies like Microsoft on advanced AI models.

However, Meta's venture into the metaverse remains a high-stakes bet with uncertain outcomes. The company's current investment in the metaverse is substantial, at about $12 billion annually. This spending has raised concerns among investors, especially given Mark Zuckerberg's control over the company.

The success of Meta's metaverse initiative and other ventures, like the partnership with Ray-Ban for Facebook glasses, remains to be seen. The company has launched various products over the years, but replicating the success of Facebook, WhatsApp, and Instagram is challenging.

Meta's stock valuation, as analyzed by SEC Diver, suggests it's currently overvalued, with a fair price range between $225 and $350. This valuation is based on backward-looking analysis, examining the company's historical growth in revenues, cash flow, and stock price. For example, while Meta's revenues and cash flow have grown significantly over the past nine years, its stock price has seen a comparatively modest increase.

The investment in reality labs and the metaverse has impacted Meta's capex, which is reflected in the stock price. Comparing Meta's growth with other companies like Visa and the broader market index provides context for understanding its valuation and growth potential.

It's important to note that our analysis is based on opinions and not financial advice. We encourage investors to conduct their own research and due diligence, considering market volatility and individual investment goals.

If you're seeking investment ideas, consider exploring the Xillion platform. We provide insights on stocks to invest in, focusing on potential growth opportunities. Xillion simplifies complex financial data, making it easy to understand and process.

For instance, when analyzing Meta, Xillion offers an overview of its overall performance, including its 10-year cumulative growth rate, which has improved from 9% to around 10-20%. Additionally, we provide context on how Meta compares with its peers. For example, Meta's price-to-sales ratio is higher than 96% of its peers, indicating it's currently an expensive stock. Similarly, its price-to-earnings ratio surpasses 93% of industry counterparts, further emphasizing its high valuation.

Xillion also highlights earnings growth, which in Meta's case, has been substantial, partly due to significant cost-cutting measures. This comprehensive analysis can help you make more informed investment decisions.

We invite you to explore Xillion and discover investment opportunities that align with your financial goals. You can start with a one-month free trial by signing up at Xillionapp.com. This platform aims to guide you on your path to financial freedom.

Thank you for joining us today. Chandan, do you have any final thoughts?

"Please try the Xillion app. It's an excellent tool for tracking your financial journey and enhancing your financial security."

Thank you, Chandan. This master class will be available online on YouTube. We appreciate everyone's participation.