Meta Platforms, Inc. Class A Common Stock

If you haven't read it yet, Ben Thompson's [Meta Myths](https://stratechery.com/2022/meta-myths/) (free) is a fantastic read on how the market might be getting it wrong on $META.

In particular, Myth 5 hit at what I've felt like has been the bull case on Meta as it's plummeted over the last year (yes, I'm a bag holder).

Myth 5: Meta’s Spending is a Waste

From my perspective, you want the companies you own investing in their businesses and widening their moat. High ROIIC (returns on _incremental_ invested capital) and long runways for capital deployment are what make home-run investments over decades long time-frames.

Seen in this light, the fact that Meta sees the opportunity to invest so much capex in AI data centers, at high ROICs, is encouraging! Of course, you have to believe management.

And to be clear, we're not talking about building the "metaverse" here. As Thompson points out, nearly all metaverse-related spending (broken out as Reality Labs in company filings) is R&D. Meta is spending ~2x as much on Capex (~$20B in 2023 on RL, ~$40B on Capex), which is AI-related investment geared for two things: solving the problems created by ATT (app tracking transparency, Apple's "privacy" initiative), and the recommendation engine for the Facebook and Instagram Reels product.

ATT and TikTok are the biggest threats to Meta's business at the moment, and I'm absolutely okay with them spending massively to head them off.

More AI is the answer to ATT because you need better ad-targeting and conversion models.

More AI is the answer to TikTok because you need a better content recommendation algorithm.

Reels is catching up and, importantly, is _not_ cannibalizing time spent on Meta's apps, per management, but is taking share from TikTok.

![Image upload](https://cdn.commonstock.com/845a1af7edc0af294011fdaf2d5d774a0b2c09dcb437b8c44b2b3254ca32a4b4-1198x265.png)

We've seen Meta execute this playbook before with Stories. Invest in copycat product that under-monetizes for while as it gains share, and scale monetization over time.

Stories didn't monetize as well as Feed for awhile, and Meta's revenue growth temporarily suffered.

Now, Reels doesn't monetize as well as Stories/Feed. They are bootstrapping engagement and  fine-tuning the product. I believe it will monetize at least as well with time.

The key is that Meta is investing in new products to keep people engaged on their apps.

With respect to ATT, the ad-targeting and conversion model might indeed be permanently impaired. But they are permanently impaired for _everyone_, not just Meta.

The _gap_ between Meta's ad-targeting and ROI-measurement capabilities and the competition's is going to grow. No one else besides Google can invest even a fraction of what Meta is investing in these capabilities. And Facebook, Instagram are still going to be the best top-of-funnel platforms for advertisers.

Widening moat.

My bet is that revenue growth re-accelerates next year as they lap a full year of ATT and Reels continues to grow engagement and scale monetization.

Yes they're spending $20B a year on the metaverse. Whatever. Write it off.

At $90/share it's twice-baked into the cake.

Consensus estimates are for EBIT margins to remain at 25% out to 2026 and for $165B in revenue.

I think that's way too low. That's a 7% 5 year revenue CAGR from 2021-2026, for a secular grower that was growing consistently at 20% before this year. I also expect EBIT margins to expand back to at least 30%, where they were consistently before 2022.

But let's pretend they don't.

2026:
Revenue: $160B
EBIT margin: 25%
Buyback: 2% shares annually (have already bought back >4% of shares outstanding in 2022 through 3 quarters)
Multiple: 7.7x EBIT (unchanged from today)

Gets you a $140 share price in 2026, or 11% annually from today's closing price of $88.80.

And this assumes nothing from Reality Labs.

_Any_ upside to revenue growth, margin expansion or multiple expansion, and you do much better.

Oh, and don't forget that TikTok is (likely) going to get banned in the USA.

Sometimes, the market hands you a gift. I think $META at 8.5x depressed earnings as they make massive investments in their business is a fat pitch.

Brave man to bet on **$META** right now but you might be on to something it could be massively undervalued right now

joseph

Undefined

First I hope every stock we at commonstock holds out performs the market. 

But I feel like with **$META** I’m looking at different graphs. 

Ben Thompson had a beautiful bull piece. 
But what I saw was this![image](https://cdn.commonstock.com/1238a9faf484c51c2061dc80d08cf8e93cc7263ecab1962b3e33e1530490d755-335x137.png)
Tanking 5 year revenue growth and expenses growth out pacing revenue growth since 2018 in all but a few weird Covid quarters. Which has been leading to
![image](https://cdn.commonstock.com/c5f14b5195d87355b65328d2f66d59e0cd8fc3960e3cc3456166976c12cb47b4-335x262.png)

![image](https://cdn.commonstock.com/aa32b72ade4c65822135630e768b9b4f186f9db04797d9ff625340d25e5693ca-335x258.png)
Worsening gross and operating margins. 

You are predicting “only 11%” EDIT growth that will give you $140/share. But most analysis I see have EBIT decreasing next year by 5% and a EPS growth of 2.8% per year over next 3-5 years. 
And revenue of 160 bil in 4 years when 2022 should come in flat yoy around 117 bil and 122 bil average estimate for 2023. 

Sorry for my neg Nancy take. I wish you well

Ben has one of the best write-ups 100%. Was a great read indeed.

Rihard Jarc

Meta deserves a bit of a discount off of its recent highs, but a number of myths about its business have caused the market to over-react.

Meta Myths

Doubling Down on $META

Bought 105% more META

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