Valuation Of Meta

Valuation Of Meta

For the first time in its history, ๐— ๐—ฒ๐˜๐—ฎ ๐˜€๐—ฎ๐˜„ ๐—ถ๐˜๐˜€ ๐—ฎ๐˜ƒ๐—ฒ๐—ฟ๐—ฎ๐—ด๐—ฒ ๐˜‚๐˜€๐—ฒ๐—ฟ๐˜€ ๐—ฑ๐—ฒ๐—ฐ๐—น๐—ถ๐—ป๐—ฒ in its platform. The markets didn’t take it lightly, and thus, ๐Œ๐ž๐ญ๐š’๐ฌ ๐ฆ๐š๐ซ๐ค๐ž๐ญ ๐œ๐š๐ฉ ๐๐ž๐œ๐ฅ๐ข๐ง๐ž๐ ๐›๐ฒ ๐Ÿ๐Ÿ“%, ๐š๐ง๐ ๐ข๐ญ๐ฌ ๐ฌ๐ก๐š๐ซ๐ž ๐ฉ๐ซ๐ข๐œ๐ž๐ฌ ๐œ๐ฎ๐ซ๐ซ๐ž๐ง๐ญ๐ฅ๐ฒ ๐ญ๐ซ๐š๐๐ž ๐š๐ญ $๐Ÿ๐Ÿ‘๐Ÿ•.๐Ÿ•๐Ÿ”.

Some of the reasons for this drop:

1)TikTokย has emerged as a ๐˜€๐—ฒ๐˜ƒ๐—ฒ๐—ฟ๐—ฒ ๐—ฐ๐—ผ๐—บ๐—ฝ๐—ฒ๐˜๐—ถ๐˜๐—ผ๐—ฟ ๐˜๐—ผ ๐—™๐—ฎ๐—ฐ๐—ฒ๐—ฏ๐—ผ๐—ผ๐—ธ, ๐—ฒ๐˜€๐—ฝ๐—ฒ๐—ฐ๐—ถ๐—ฎ๐—น๐—น๐˜† ๐—ถ๐—ป ๐—”๐—ณ๐—ฟ๐—ถ๐—ฐ๐—ฎ๐—ป ๐—ฎ๐—ป๐—ฑ ๐—Ÿ๐—ฎ๐˜๐—ถ๐—ป ๐—”๐—บ๐—ฒ๐—ฟ๐—ถ๐—ฐ๐—ฎ๐—ป ๐—ฐ๐—ผ๐˜‚๐—ป๐˜๐—ฟ๐—ถ๐—ฒ๐˜€. However,ย Mark Zuckerberg acknowledges that the user engagement has dropped and hopesย Reelsย could bring back the lost users.

2)Due toย Apple‘s privacy feature, iPhone users have refused permission for Meta to look at their browsing history, ๐—บ๐—ฎ๐—ธ๐—ถ๐—ป๐—ด ๐—ถ๐˜๐˜€ ๐—ฎ๐—ฑ ๐˜๐—ฎ๐—ฟ๐—ด๐—ฒ๐˜๐—ถ๐—ป๐—ด ๐—น๐—ฒ๐˜€๐˜€ ๐—ฒ๐—ณ๐—ณ๐—ฒ๐—ฐ๐˜๐—ถ๐˜ƒ๐—ฒ.

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:

๐˜™๐˜ฆ๐˜ท๐˜ฆ๐˜ฏ๐˜ถ๐˜ฆ๐˜ด – $117,929 ๐˜ฎ๐˜ช๐˜ญ๐˜ญ๐˜ช๐˜ฐ๐˜ฏ

๐˜Œ๐˜‰๐˜๐˜› – $46,753 ๐˜ฎ๐˜ช๐˜ญ๐˜ญ๐˜ช๐˜ฐ๐˜ฏ ๐˜ข๐˜ต 40% ๐˜ฎ๐˜ข๐˜ณ๐˜จ๐˜ช๐˜ฏ

๐˜Œ๐˜—๐˜š – $14

๐˜‰๐˜ฐ๐˜ฐ๐˜ฌ ๐˜ท๐˜ข๐˜ญ๐˜ถ๐˜ฆ ๐˜ฐ๐˜ง ๐˜ฆ๐˜ฒ๐˜ถ๐˜ช๐˜ต๐˜บ = $124,879 ๐˜ฎ๐˜ช๐˜ญ๐˜ญ๐˜ช๐˜ฐ๐˜ฏ

๐˜›๐˜ฐ๐˜ต๐˜ข ๐˜‹๐˜ฆ๐˜ฃ๐˜ต = $13,873

๐˜Š๐˜ข๐˜ด๐˜ฉ ๐˜ข๐˜ฏ๐˜ฅ ๐˜š๐˜ฉ๐˜ฐ๐˜ณ๐˜ต ๐˜›๐˜ฆ๐˜ณ๐˜ฎ ๐˜ช๐˜ฏ๐˜ท๐˜ฆ๐˜ด๐˜ต๐˜ฎ๐˜ฆ๐˜ฏ๐˜ต๐˜ด = $47,998 ๐˜ฎ๐˜ช๐˜ญ๐˜ญ๐˜ช๐˜ฐ๐˜ฏ

With the above numbers,
๐— ๐—ฒ๐˜๐—ฎ’๐˜€ ๐—ฎ๐—ณ๐˜๐—ฒ๐—ฟ-๐˜๐—ฎ๐˜… ๐—ฅ๐—ข๐—œ๐—–=๐Ÿฏ๐Ÿณ.๐Ÿฐ๐Ÿญ% ๐—ฎ๐—ป๐—ฑ ๐—ฅ๐—ข๐—˜ = ๐Ÿฏ๐Ÿญ.๐Ÿญ%

1643950320195

๐—œ๐˜๐˜€ ๐—˜๐—•๐—œ๐—ง ๐—ด๐—ฟ๐—ผ๐˜„๐˜๐—ต ๐—ฟ๐—ฎ๐˜๐—ฒ ๐—ผ๐˜ƒ๐—ฒ๐—ฟ ๐—น๐—ฎ๐˜€๐˜ ๐˜†๐—ฒ๐—ฎ๐—ฟ = ๐Ÿฐ๐Ÿฏ.๐Ÿญ% ๐—ฎ๐—ป๐—ฑ ๐—ถ๐˜๐˜€ ๐—ฟ๐—ฒ๐˜ƒ๐—ฒ๐—ป๐˜‚๐—ฒ ๐—ด๐—ฟ๐—ผ๐˜„๐˜๐—ต = ๐Ÿฏ๐Ÿณ.๐Ÿญ๐Ÿด%

If i assume –

1)Meta’s user growth continues to decline as more FB users move to Tiktok; I give a ๐—ด๐—ฟ๐—ผ๐˜„๐˜๐—ต ๐—ฟ๐—ฎ๐˜๐—ฒ ๐—ผ๐—ณ ๐Ÿญ๐Ÿฐ% ๐—ถ๐—ป ๐˜๐—ต๐—ฒ ๐—ป๐—ฒ๐˜…๐˜ ๐—ณ๐—ถ๐˜ƒ๐—ฒ ๐˜†๐—ฒ๐—ฎ๐—ฟ๐˜€.

2)Meta will ๐—น๐—ผ๐˜€๐—ฒ ๐˜€๐—ผ๐—บ๐—ฒ ๐—ผ๐—ณ ๐—ถ๐˜๐˜€ ๐—ป๐—ฒ๐˜๐˜„๐—ผ๐—ฟ๐—ธ๐—ถ๐—ป๐—ด ๐—ฒ๐—ณ๐—ณ๐—ฒ๐—ฐ๐˜๐˜€, 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 ๐—ฐ๐—ผ๐˜€๐˜ ๐—ผ๐—ณ ๐—ฐ๐—ฎ๐—ฝ๐—ถ๐˜๐—ฎ๐—น ๐—ณ๐—ผ๐—ฟ ๐— ๐—ฒ๐˜๐—ฎ ๐—ฎ๐˜ ๐Ÿด.๐Ÿฏ๐Ÿฑ%

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 ๐Œ๐ž๐ญ๐š ๐š๐ญ $๐Ÿ๐Ÿ—๐Ÿ•.๐Ÿ’๐Ÿ“ ๐ฉ๐ž๐ซ ๐ฌ๐ก๐š๐ซ๐ž 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 ๐˜๐—ฟ๐—ฎ๐—ฑ๐—ถ๐—ป๐—ด ๐—ฎ๐˜ ๐—ฎ ๐˜€๐—ถ๐—ด๐—ป๐—ถ๐—ณ๐—ถ๐—ฐ๐—ฎ๐—ป๐˜ ๐—ฑ๐—ถ๐˜€๐—ฐ๐—ผ๐˜‚๐—ป๐˜. Therefore, I believe it is an ideal time for ๐— ๐—ฒ๐˜๐—ฎ’๐˜€ ๐—บ๐—ฎ๐—ป๐—ฎ๐—ด๐—ฒ๐—บ๐—ฒ๐—ป๐˜ ๐˜๐—ผ ๐—ฏ๐˜‚๐˜† ๐—ฏ๐—ฎ๐—ฐ๐—ธ ๐˜€๐—ต๐—ฎ๐—ฟ๐—ฒ๐˜€.



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