- July 29, 2022
- Posted by: Ramkumar
- Category: Posts
Valuation Of Meta
For the first time in its history, 𝗠𝗲𝘁𝗮 𝘀𝗮𝘄 𝗶𝘁𝘀 𝗮𝘃𝗲𝗿𝗮𝗴𝗲 𝘂𝘀𝗲𝗿𝘀 𝗱𝗲𝗰𝗹𝗶𝗻𝗲 in its platform. The markets didn’t take it lightly, and thus, 𝐌𝐞𝐭𝐚’𝐬 𝐦𝐚𝐫𝐤𝐞𝐭 𝐜𝐚𝐩 𝐝𝐞𝐜𝐥𝐢𝐧𝐞𝐝 𝐛𝐲 𝟐𝟓%, 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐬𝐡𝐚𝐫𝐞 𝐩𝐫𝐢𝐜𝐞𝐬 𝐜𝐮𝐫𝐫𝐞𝐧𝐭𝐥𝐲 𝐭𝐫𝐚𝐝𝐞 𝐚𝐭 $𝟐𝟑𝟕.𝟕𝟔.
Some of the reasons for this drop:
1)TikTok has emerged as a 𝘀𝗲𝘃𝗲𝗿𝗲 𝗰𝗼𝗺𝗽𝗲𝘁𝗶𝘁𝗼𝗿 𝘁𝗼 𝗙𝗮𝗰𝗲𝗯𝗼𝗼𝗸, 𝗲𝘀𝗽𝗲𝗰𝗶𝗮𝗹𝗹𝘆 𝗶𝗻 𝗔𝗳𝗿𝗶𝗰𝗮𝗻 𝗮𝗻𝗱 𝗟𝗮𝘁𝗶𝗻 𝗔𝗺𝗲𝗿𝗶𝗰𝗮𝗻 𝗰𝗼𝘂𝗻𝘁𝗿𝗶𝗲𝘀. However, Mark Zuckerberg acknowledges that the user engagement has dropped and hopes Reels could bring back the lost users.
2)Due to Apple‘s privacy feature, iPhone users have refused permission for Meta to look at their browsing history, 𝗺𝗮𝗸𝗶𝗻𝗴 𝗶𝘁𝘀 𝗮𝗱 𝘁𝗮𝗿𝗴𝗲𝘁𝗶𝗻𝗴 𝗹𝗲𝘀𝘀 𝗲𝗳𝗳𝗲𝗰𝘁𝗶𝘃𝗲.
Thus, i decided to value Meta on its latest numbers in the annual report to validate if this drop in share price is justified.
As of December 2021, Facebook’s financials are as follows:
𝘙𝘦𝘷𝘦𝘯𝘶𝘦𝘴 – $117,929 𝘮𝘪𝘭𝘭𝘪𝘰𝘯
𝘌𝘉𝘐𝘛 – $46,753 𝘮𝘪𝘭𝘭𝘪𝘰𝘯 𝘢𝘵 40% 𝘮𝘢𝘳𝘨𝘪𝘯
𝘌𝘗𝘚 – $14
𝘉𝘰𝘰𝘬 𝘷𝘢𝘭𝘶𝘦 𝘰𝘧 𝘦𝘲𝘶𝘪𝘵𝘺 = $124,879 𝘮𝘪𝘭𝘭𝘪𝘰𝘯
𝘛𝘰𝘵𝘢 𝘋𝘦𝘣𝘵 = $13,873
𝘊𝘢𝘴𝘩 𝘢𝘯𝘥 𝘚𝘩𝘰𝘳𝘵 𝘛𝘦𝘳𝘮 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵𝘴 = $47,998 𝘮𝘪𝘭𝘭𝘪𝘰𝘯
With the above numbers,
𝗠𝗲𝘁𝗮’𝘀 𝗮𝗳𝘁𝗲𝗿-𝘁𝗮𝘅 𝗥𝗢𝗜𝗖=𝟯𝟳.𝟰𝟭% 𝗮𝗻𝗱 𝗥𝗢𝗘 = 𝟯𝟭.𝟭%
𝗜𝘁𝘀 𝗘𝗕𝗜𝗧 𝗴𝗿𝗼𝘄𝘁𝗵 𝗿𝗮𝘁𝗲 𝗼𝘃𝗲𝗿 𝗹𝗮𝘀𝘁 𝘆𝗲𝗮𝗿 = 𝟰𝟯.𝟭% 𝗮𝗻𝗱 𝗶𝘁𝘀 𝗿𝗲𝘃𝗲𝗻𝘂𝗲 𝗴𝗿𝗼𝘄𝘁𝗵 = 𝟯𝟳.𝟭𝟴%
If i assume –
1)Meta’s user growth continues to decline as more FB users move to Tiktok; I give a 𝗴𝗿𝗼𝘄𝘁𝗵 𝗿𝗮𝘁𝗲 𝗼𝗳 𝟭𝟰% 𝗶𝗻 𝘁𝗵𝗲 𝗻𝗲𝘅𝘁 𝗳𝗶𝘃𝗲 𝘆𝗲𝗮𝗿𝘀.
2)Meta will 𝗹𝗼𝘀𝗲 𝘀𝗼𝗺𝗲 𝗼𝗳 𝗶𝘁𝘀 𝗻𝗲𝘁𝘄𝗼𝗿𝗸𝗶𝗻𝗴 𝗲𝗳𝗳𝗲𝗰𝘁𝘀, reflecting its EBIT drop. More investments in Metaverse will further drop its EBIT. I have assumed Meta’s target EBIT after ten years is 35%
3)Meta incurred an R&D expense of $24,665 million, and i capitalised on the R&D expense at an amortisation period of 3 years.
4)Meta’s revenues come from 97% advertising and the remaining from software resulting in a levered beta of 1.46
5)Meta gets 47% of revenues from North America and 25% from Europe, and 28% from the rest of the world. I give an implied ERP of 4.63%
At the above inputs, i get the 𝗰𝗼𝘀𝘁 𝗼𝗳 𝗰𝗮𝗽𝗶𝘁𝗮𝗹 𝗳𝗼𝗿 𝗠𝗲𝘁𝗮 𝗮𝘁 𝟴.𝟯𝟱%
At the next five-year revenue growth rate of 13.8%, WACC of 8.35%, and target EBIT% at the end of 10 years at 35%, I value 𝐌𝐞𝐭𝐚 𝐚𝐭 $𝟐𝟗𝟕.𝟒𝟓 𝐩𝐞𝐫 𝐬𝐡𝐚𝐫𝐞 giving a price/value for growth at 51.32%.
If i do a relative valuation at EV/EBIT of 18.65 that advertising firms trade in the US, i price Meta at $337/share.
Thus, Meta is currently 𝘁𝗿𝗮𝗱𝗶𝗻𝗴 𝗮𝘁 𝗮 𝘀𝗶𝗴𝗻𝗶𝗳𝗶𝗰𝗮𝗻𝘁 𝗱𝗶𝘀𝗰𝗼𝘂𝗻𝘁. Therefore, I believe it is an ideal time for 𝗠𝗲𝘁𝗮’𝘀 𝗺𝗮𝗻𝗮𝗴𝗲𝗺𝗲𝗻𝘁 𝘁𝗼 𝗯𝘂𝘆 𝗯𝗮𝗰𝗸 𝘀𝗵𝗮𝗿𝗲𝘀.