Portfolio Pillars #2: Meta📱

Asymmetric upside makes this social media giant a buy

As the most prominent and dominant social media conglomerate, Meta has built itself into a highly durable behemoth with a defensible moat.

Founded in 2004 by Mark Zuckerberg, Facebook pioneered the social media format that has since emerged as a multi-hundred-billion dollar industry. Today, Meta, which encompasses Facebook, Instagram, WhatsApp, Messenger, Oculus, and so many others, has flourished into one of the world’s largest companies and I believe it’s set to grow even larger over the coming decade and beyond. 

The past thirty years has seen innovation accelerate at unprecedented levels. Riding the wave of internet adoption, Facebook swiftly gained traction, exhibiting strong network effects attributable to its initial core user base of college students. Since then, the platform has perpetually grown to nearly 3 billion users a month, or roughly half the world population. Apart from YouTube (which has around 2 billion users), no platform comes remotely close in terms of scale. Facebook’s superiority was once priced accordingly, but today investors seem to have forgotten how dominant the platform really is. And that spells opportunity. 

Over 18 years ago, on February 4, 2004, 19-year old Harvard student Mark Zuckerberg, along with some of his classmates (Eduardo Saverin, Andrew McCollum, Dustin Moskovitz, and Chris Hughes), launched a website called Thefacebook. Site visitors were greeted with the message, “Thefacebook is an online directory that connects people through social networks at colleges.” Initially designed for Harvard students, Mark began to realize how broad the use-cases were for the platform. Expanding to other colleges and later high schools, Thefacebook grew to over 1 million users by the end of 2004. Enticed, PayPal co-founder Peter Thiel invested $500,000 in the company. Mark, then a Sophomore, dropped out of Harvard and moved his team over to Silicon Valley, where Thiel was based. 

When News Feed was released on September 6, 2006 and the platform was opened to the general public, Facebook commenced one of the greatest growth stories in corporate history. By 2009, Facebook (“the” was dropped in 2005) had reached 350 million users and was invariably the largest social media platform. The 1 billion milestone would come a mere three years later. 

Facebook’s parabolic growth persisted throughout the 2010s, a rosy decade for the company during which they went public (2012), achieved previously unfathomable user milestones, made a number of brilliantly strategic and lucrative acquisitions, and emerged as a tech giant. Their story continues into the 2020s, a decade so far scarred with a deadly worldwide pandemic, a resulting yet brief recession, and a second recession that will undeniably supersede its predecessor in depth and longevity. Even with the unparalleled uncertainty ahead, I’m confident Meta is capable of weathering whatever headwinds it faces, as it’s done for the past 18 years. And due to a multitude of catalysts, will be a much more prominent entity in 2030. 

DAU/MAU is a powerful metric for user engagement, measuring the ratio of daily active users over monthly active users which results in a percentage. This yields an understanding of how active monthly users are on a daily basis. Historically, apps with 50%+ are considered to have exceptionally strong engagement. Since its founding, Facebook’s DAU/MAU has been in excess of 50%. Looking at the results from Meta’s most recent earnings (Q2 2022), Facebook had 1.968 billion DAUs and 2.934 billion MAUs, equating to an exceptional ratio of 67%. Transcribed in the small table above, this level has been sustained for years, alluding to the robustness and consistently high engagement of the platform.

While out of fashion among the younger generation in the U.S (I’ll talk about why this isn’t an issue later), Facebook continues to be incredibly popular in developing countries, with 90% of the platform’s 1.968 billion daily active users coming from outside the United States and Canada, where the platform is still looked at in a more favorable manner. 

After DAUs (daily active users) declined for the first time ever in Q4 2021, the stock was unjustifiably hammered, signaling that investors were caught off guard. Yet, saturation was inevitable given the finite world population and technological limitations all too common in third world countries. What should be of greater importance to investors is user retention, as increasing ARPU is ultimately more lucrative than incremental user additions. And as more of the world gains access to phones and computers, continued slow incremental growth should ensue. 

Facebook is continually iterating. In 2012, it was reported that Facebook’s code was updated twice a day. Recently, in an effort to take on TikTok, Facebook overhauled its content feed to incorporate a “discovery engine” that displays content unrelated to what users’ friends post. Numerous similar additions have been made to the platform over the past decade, molding it into somewhat of a superapp. Incorporating E-commerce has been a recent foray that was received remarkably well.

In 2016, Facebook launched Facebook Marketplace, a platform for selling just about anything, analogous to eBay or Craigslist. The marketplace generated an astounding $26 billion in revenue in 2021 on a 48% YoY increase. For perspective, eBay did $10.42 billion in revenue that same year. 

Facebook Marketplace’s success is a testament to how paramount it is to be the largest social media platform in the world, and the extensive monetization opportunities that result. Nearly every major feature addition is poised for success simply because of the scale the platform has already amassed. Instead of having to acquire new users, they simply have to nudge them into using additional features. That’s precisely their competitive advantage. 

For example, Facebook Gaming, which was just launched in 2018, is already battling with YouTube to be the second largest live-streaming platform. Mark Zuckerberg recently declared that Facebook Gaming won’t take a revenue cut until 2024. Thus, the platform should continue to gain popularity while acting as a major revenue tailwind in 2024 and beyond. 

Unlike what most investors and analysts say, Facebook is only a fraction of the ever-expanding Meta ecosystem. Meta owns the top 4 mobile apps by cumulative downloads between Q1 2014 and Q3 2021: Facebook, WhatsApp, Instagram, Messenger. Strong synergies and interoperability exist between the apps, making the ecosystem ever-stronger. Instagram, which was acquired in 2012 for $1 billion in an acquisition that is commonly regarded as the best in history, is essentially the Facebook of younger generations (Millennials, Gen Z, etc). Therefore, the notion that Facebook’s stagnation of user growth will be the death of its parent company is utterly asinine. In 2021, Instagram generated an estimated $47.6 billion in revenue, accounting for almost 50% of Meta’s total revenue. As both ARPU and MAUs grow for Meta’s other apps like Instagram, Facebook’s revenue will be increasingly diluted and a diminishing portion of the company’s overall success. 

“Instagram has played a central role in this century’s popular culture, with popular users dubbed ‘influencers’. Influencers have become a key demographic for Instagram, and the app has opened up its platform with shopping and other marketing tools to make these popular users more successful” 

- Business of Apps

Over the past decade, Instagram has taken the world by storm. In addition to enabling users to see what their friends are up to, Instagram has played an integral role in creating a whole new profession, known as the “Influencer”. As bizarre and uncanny as it may sound, influencers with a large following on platforms like Instagram are equipped with a variety of tools to effectively monetize their audience. Nowadays, simply posting ads in partnership with corporations, selling merch, or publishing books make being an influencer a viable profession. The photo-native format of Instagram has facilitated the success of this new demographic, giving rise to Kim Kardashian, Kylie Jenner, and millions of other popular stars. With over two billion users a month, Instagram is the fourth most popular social app in the world and by far the largest photo-sharing platform. The platform has one of the best business models in the world; Instead of having to pay creators for the content generated, they merely have to curate and moderate it. Given that Instagram is adored by younger generations and used by roughly 80% of American teenagers, it’s poised to grow even larger if it remains fashionable among the next generations. 

In Meta’s Q2 earnings report, Mark Zuckerberg revealed that the company had crossed a $1 billion annual revenue run rate for ads on Reels, its short-video platform rivaling TikTok. The success of Reels on Instagram has been apparent, with the feature now taking up over 20% of the time spent on the platform. As Meta has done with numerous features like Stories (which was essentially copied from Snap) in the past, they’re willing to take a transitory advertising hit while their monetization capabilities improve. With Reels now taking up 20% of time spent yet not being monetized as efficiently as other aspects of the platform, it’s having a substantial net negative effect on Meta’s revenue. Zuck pointed this out during the Q2 earnings call:

“One near term challenge is the growth of short-form video. Reels doesn't yet monetize at the same rate as feed or stories, so in the near term, the faster Reels grows, the more revenue that actually displaces from higher-monetizing surfaces. Now in theory, we could mitigate this short term headwind by pushing less hard on growing Reels, but that would be worse for our products and business longer term since we're confident Reels will grow engagement overall and quality and will eventually monetize closer to feed. Our work on ads monetization efficiency for Reels is actually making faster progress than we'd expected. We've now crossed $1B annual revenue run rate for Reels ads, and Reels also has a higher revenue run rate than Stories did at identical times post launch. So the bottom line is I think we're on track here, and we just need to push through this one.”

The growing sentiment that Tiktok will subvert Meta’s social media domination is highly improbable for a multitude of reasons. First of all, TikTok only offers one media format: short-form video. And while this has proven incredibly popular, it will never capture all of a user's attention. In fact, avid users of TikTok can also be avid users of Instagram and vice versa. Multiple niches exist among the social media space: chat, video-native,and image-native. Instagram and Facebook offer all of these formats and are essentially the superapps of social media. 

Since TikTok’s unprecedented rise to billions of users, backlash has grown. An increasingly popular narrative is that TikTok is full of low-quality, meaningless content. I would tend to agree. Watching videos of teenagers aimlessly dancing isn’t exactly something one would be proud of doing all day. Thus, the platform is losing and has already lost its appeal among those in search of more civilized content. The most troubling facet of TikTok is its ties to the Chinese Government. Back in 2020, the Trump administration went as far as banning the platform in the U.S., which the Biden administration later overturned. With TikTok’s reputation smeared and fears of Chinese data extraction persisting, it’s plausible Reels could grow to be just as large if not larger. Analyst Youssef Squali, who has a buy rating on Meta Platforms shares, noted that the combination of Reels on Facebook and Instagram is likely to surpass TikTok in revenue by the end of 2023. It’s safe to say that TikTok competition concerns are well overblown.

WhatsApp is one of the world’s dominant messaging services, and a near-prerequisite for communicating with relatives internationally. Acquired by Meta for $19 billion in 2014, WhatsApp was a major addition to the company’s social media ecosystem. As the leader and pioneer of end-to-end encrypted messaging (messages aren’t viewable to anyone but the user and the recipient), WhatsApp is the fourth most downloaded app so far in 2022, a spot it also claimed throughout 2021. In both instances (2021 and 2022) the top three most downloaded apps were TikTok, Instagram, and Facebook. While Meta doesn’t break out WhatsApp’s user statistics, it’s estimated that WhatsApp has well over 2 billion MAUs and a high DAU/MAU ratio given its main functionality of messaging. 

While it’s achieved near-unparalleled scale, WhatsApp has yet to be effectively monetized. Like all of Meta’s apps, WhatsApp is a free-to-use service. Unlike its sister apps, WhatsApp is also an ad-free platform. Thus, they’ve been forced to rely on two main methods of revenue generation: WhatsApp for Business and WhatsApp Pay. WhatsApp for Business enables companies to use the platform for messaging functionalities such as sales or support. WhatsApp’s Business App is used by over 50 million businesses worldwide, out of which 15 million are Indian. As one website put it: 

If you aren't Marketing on WhatsApp in 2022, you aren't Marketing at all.

WhatsApp’s Business API is used by a considerable number of major brands such as Netflix, Uber and Wish. The pricing of this API is  based on a messaging tier. The rates are shown below:

• First 250,000 messages: $0.0085 per message

• Next 750,000 messages: $0.0083 per message

• Next 2 million messages: $0.0080 per message

• Next 3 million messages: $0.0073 per message

• Next 4 million messages: $0.0065 per message

• Above 10 million messages: $0.0058 per message

In essence, the more messages a company sends, the cheaper it is on a per message basis. According to AiSensy, here are a few of the most salient reasons for businesses to use WhatsApp:

• Reach an enormous audience with 2.2 Billion Global users,

• Build strong relationships with customers (1:1 live conversations) and,

• Boost sales by sending promotional messages on WhatsApp.

• Improves relations & connectivity- WhatsApp allows businesses to personalize their conversations with customers.

• Increased Conversion Rates upto 7x - WhatsApp helps businesses, just like yours to increase their conversions by upto 112% by reaching out to customers with the latest offers and customized messages.

• Lowers cost of Marketing- WhatsApp is highly affordable! It costs close to nothing in comparison with the ROI you can achieve with this marketing channel.

• Excellent Customer Support- WhatsApp gives businesses the flexibility to enhance their customer support with a WhatsApp Business API platform like AiSensy.

In Marketing, a commonly advised strategy is to look for undersaturated advertising channels. Given WhatsApp’s cheap cost per message, the company should undergo robust growth as the secular rise of B2C messaging plays out. 

"We want businesses of all sizes and across all industries to discover the value of messaging," Dan Levy, VP of Ads and Business Products, and Matt Idema, COO, WhatsApp wrote in a press release.

WhatsApp Pay is a solution similar to that of Venmo or Cash App, except only usable among WhatsApp contacts. Having a payment system built within a messaging platform makes sense, and instead of having to open another app to pay back a friend you can simply use WhatsApp Pay. Thus, for the moment, it’s merely a convenience play for Meta. Users receiving a payment are taxed with an estimated 4% fee. While it’s currently only available in India, Brazil, and a small fraction of users in the US, WhatsApp Pay could plausibly expand internationally over the next few years. With India being the fastest-growing digital payment market and WhatsApp having nearly 400 million MAUs in the country, success with WhatsApp Pay could materially boost Meta’s revenue. The launching of Meta Pay, a digital wallet functional within all of Meta’s core apps, including WhatsApp, may simply result in a merger of the two solutions. 

The table above displays estimates of WhatsApp’s revenue. Since Meta set out to monetize the platform in 2018, growth has been explosive. As businesses realize the profound benefits of utilizing WhatsApp and WhatsApp Pay (or Meta Pay) launches internationally, revenue growth could feasibly maintain its current trajectory. 

Originally launched as Facebook Chat within the Facebook app, Messenger was spun off as a standalone app in 2011. With nearly a billion MAUs, according to a report of the most popular global messaging apps of January 2022 from Statista, Messenger is the second-largest messaging app when discounting WeChat, the massive Chinese platform. Therefore, Meta owns the two most dominant messaging apps in the world, and its competition is trivial at best. 

​​Messenger is where almost one-eighth of the world’s population hangs out, and for marketers, this is a significant volume of people who can be actively engaged with and targeted with ad campaigns.                  - Hootsuite

Messenger’s monetization is essentially the same as that of WhatsApp: businesses pay per message with customers (oftentimes through an API) and users pay fees for transacting through Meta Pay. From a user standpoint, Messenger differs from WhatsApp in that it is also the native messaging system within both Facebook and Instagram, creating enhanced interoperability between the apps. Meta’s ecosystem of apps becomes increasingly apparent when you discover Meta Pay and Messenger. With Messenger constantly releasing new features, such as the ability for users to watch movies/shows together from different locations, its prominence should only grow. Additionally, recent talks of end-to-end encryption coming to the platform will vindicate it of privacy concerns and attract even more users. 

While Facebook, Instagram, WhatsApp, and Messenger make up the vast majority of Meta’s revenue, the company owns a variety of other apps. Launched in 2016, Workplace is a platform enabling you to “turn your company into a community”. Initially conceived as an enterprise version of Facebook, the platform has emerged as a competitor to Slack, though executives say customers sometimes use both products. Workplace is indicative of Meta’s growing appetite to expand into the enterprise sector, especially through highly sought after subscription models. 

While Meta hasn’t publicly updated paid user data for Workplace since May 4, 2021, insiders estimate the current platform currently has well in excess of 10 million paid users. Workplace’s App Store ratings are almost perfect, with 91,000 ratings and 4.9 stars. As more companies strive to build internal communities, Workplace will benefit tremendously. Customers include Virgin Atlantic, Walmart, Telefónica, BT, Booking.com, Deliveroo, AstraZeneca, Starbucks, and Save the Children. In June, the company inked a deal with McDonald’s for its over 2 million employees to use the service. The deal alone likely catalyzed a material jump in revenue for the company. With nearly 11 million companies in the U.S., Workplace has tons of room to grow. 

"Our goal is we want to connect everyone on the planet who works and has a device with an internet connection,"           

   - Karandeep Anand, Head of Workplace 

Giphy, the dominant GIF-sharing platform/database, was acquired by Meta for $400 million in 2020. Shortly afterward, the CMA (the Competition and Markets Authority in the U.K.) blocked Meta from integrating all of Giphy’s technology/APIs into its platforms and forced it to sell the company, claiming it would give Meta an unfair advantage over its rivals. In the past month though, the CMA confirmed it would take another look at the deal. Were the deal to be approved, as appears to potentially be the case, Meta would gain access to all of Giphy’s APIs while generating licensing revenue from Twitter, Tiktok, Snapchat, and nearly every other social media platform. 

Meta’s interest in Giphy could have also been spurred by potential advertising capabilities such as enabling companies to create their own GIFs. Giphy has compiled the most extensive collection of GIFs and is therefore of considerable value to social media platforms that rely on the company’s APIs to enable their users to send/receive GIFs. With over 433,000 ratings on the App Store and 4.8 stars, Giphy offers Meta control of yet another invaluable niche and another revenue stream as it aims for diversification. 

Arguably the smallest of Meta’s apps is Mapillary, a street-level imagery platform that was acquired in 2020 for an undisclosed sum. Mapillary crowdsources pictures that can be submitted from a GoPro, smart phone, or just about any camera. A Meta spokesman revealed that while Mapillary might be key for self-driving car technology, it’ll also support Meta’s AR and VR glasses. 

Going forward, Meta’s ecosystem of apps will expand by two main vectors: the New Product Experimentation (NPE) team and acquisitions. The latter has become increasingly implausible as a result of heightened regulatory scrutiny. Yet, Meta will do everything imaginable to maintain its indubitable control over the social media sector while it attempts to dominate the nascent VR market. 

Meta’s New Product Experimentation team was initially launched back in mid-2019 to focus on building consumer facing apps to test out new social features. The team has released and retired over a dozen apps since. Here’s a little color on most of them:

• Super, a Cameo-like platform for connecting with celebrities, which appears to be no longer available

• Hotline, a social audio app in the vein of Clubhouse which launched in beta last April, but has since been removed

• Forecast, which aimed to facilitate crowd-sourced predictions, was launched in June 2020, then shut down in October last year

• Venue, a live sports engagement app was launched in May 2020, and shut down sometime last year

• CatchUp, to facilitate phone calls between friends who are up for a chat, launched in May 2020 and is now gone from the App Store

• Collab, for music collaborations via short video clips launched in May 2020 and will shut down this March.

• Kit, which provided expanded messaging options via Apple Watch, is now gone from the app store

• Hobbi, which provided a way to collect images of creative hobbies, and sort them into boards lasted just six months

• Whale, a meme creation tool, quietly launched in November 2019, lasted till just recently, based on reported updates.

• AUX, a participatory DJ app also didn’t make it

• Bump, a chat app, also failed to hold its place

• Move, a social way to organize your tasks, launched in March and still remains

• Tuned, an app for couples to engage with each other, being shut down on September 19th, 2o22

• Bars, an app that allows you to rap to beats with your friends, released in February

Credit: Social Media Today

Even though some of the apps quickly accumulated downloads and praises, such as Tuned, NPE still decided to pull the plug on them. Tuned, the app for couples, already had 20,000 reviews and 4.8 stars. With all apps proving to be duds in the eyes of NPE, their track record isn’t exactly flattering, unless they were merely interested in understanding new trends for which new features can be developed and implemented into their main apps. In December of 2021, NPE announced a realignment of their goals:

“As Meta enters a new era of building for the future, we’re taking these and other lessons learned into the next phase of our journey. Our approach to experimentation will remain the same: building new products from the ground-up and investing in external startups. But we believe that building universal products and experiences in this new era will require a different mindset. While technology-centric experimentation will always be a part of what we do (i.e., we’re just as excited about Web3 and AI as everyone else), we’re shifting more attention to meet the needs of a rapidly changing global society.”

“So, in addition to NPE’s existing approach — building new experimental products from the ground-up — over the past year, we’ve also experimented with ways to get capital into the hands of founders and early stage teams who share our mission. To start, we made a few initial investments, and will be exploring other scalable ways to partner with more seed-stage and series A startups.”

“Because of that, we’re expanding from our current US footprint to build with and for communities across Africa, Asia, and Latin America, and scaling what works there across the globe. Right now, the increase of global connectivity and falling cost of experimentation have created new opportunities. During this next era, anyone with a design mindset, wherever they are, can quickly see that rapid experimentation overrides received wisdom, and adapt. We need to be more intentional about building with proximity to how the world looks today, and how it’s going to look tomorrow. In time, this is how we’ll learn to identify universal experiences.”

This enhanced focus on funding early-stage startups in emerging markets seems to be somewhat of a hedge against producing in-house apps that continue to languish. Hopefully the next three years of NPE will prove more lucrative than the last, as producing killer apps internally is likely all Meta can resort to. 

Since Meta’s acquisitions of Instagram and WhatsApp, the company has yet to strike again. Given their excellent balance sheet ($40+ billion in cash, $16 billion in debt), this inaction isn’t caused by their financial position but greater acquisition scrutiny. Due to growing antitrust concerns, especially since Lina Khan’s appointment to FTC chair, large acquisitions even in loosely related industries are becoming increasingly strenuous. On October 21, 2021, Meta announced that it had agreed to acquire Within, the maker of VR fitness app Supernatural, for $400 million. In the past month, the FTC sued Meta in an attempt to block the acquisition. Given its relatively minor size, it objectively seems as if the FTC simply despises Meta. Thus, at least for the time being, large acquisitions in the social media sector are pretty much out the window for the company. 

Hardware, which hasn’t historically been one of Meta’s competencies, is invariably becoming a more significant portion of both the company’s revenue and future success. Meta officially operates under two segments: Family of Apps and Reality Labs. Family of Apps is what I’ve discussed above. At the moment, the most salient businesses within Reality Labs are Oculus and Portal. Their “about us” statement is more granular than their underlying operations: 

“Reality Labs brings together a world-class team of researchers, developers, and engineers to build the future of connection within virtual and augmented reality.”

In 2021, Mark Zuckerberg and Meta pledged to invest $10 billion a year into building out their AR and VR ecosystem. Given widespread ambivalence toward the concept of a metaverse, the announcement has unsurprisingly been a major catalyst for the miserable performance of the stock. In actuality, for those who believe AR and VR will be an integral part of our lives in ten to fifteen years, shares are now laughably cheap. 

Another remarkable purchase by Zuck & Co was Oculus, which was acquired for $2 billion in 2014. Back then, Oculus was only 2 years old and the technological potential hadn’t yet been realized by much of the world. Mark had the foresight to recognize that the mobile format wouldn’t dominate forever and that evolution to an immersive experience was inevitable. Here’s a quote from Meta’s (still called Facebook at the time) press release announcing the acquisition:

“Mobile is the platform of today, and now we’re also getting ready for the platforms of tomorrow,” said Facebook founder and CEO, Mark Zuckerberg. “Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate.”

Today, Oculus reportedly accounts for 90% of the VR headset market, with no alternative product coming remotely close to its utility or price point. Oculus represents Meta’s best-selling hardware product/line to date. Thus, Meta is perfectly positioned in that it maintains assertive control over the mobile format while leading and architecting the next-generation VR industry that will plausibly be its successor. Management has acknowledged that the company is in a transitory period, with mobile social media exhibiting signs of saturation and VR still being nascent. 

Meta’s Project Cambria

Just like the decades-long evolution of computers and phones, VR headsets over time will shrink considerably while functionalities balloon. Eventually, headsets may merely be referred to as glasses with expansive AR and VR capabilities. This exact scenario is playing out in the electric vehicle landscape with batteries contracting while range expands. Those who were cognizant of this trend early on made a fortune, as will those that see the all-encompassing potential of VR. 

Revenue growth for the Reality Labs segment exceeds that of the Family of Apps and continued expansion of the Oculus ecosystem may result in the creation of its own segment. As illustrated above, ARR (annual [revenue] run rate) for Reality Labs is well north of $2 billion, yet losses continue to grow. 

Oculus has two core monetization opportunities: hardware sales and app/merchandise purchases. While figures aren’t publicly documented, it seems probable that the majority of the company’s current revenue comes from hardware sales. Meta is well equipped to build a robust hardware business. Even if these products are sold at wafer-thin margins, the long term benefit for the overall ecosystem will be significant. The low margins have ultimately enabled Oculus to undercut competitors and acquire invaluable market share. Therefore, I perceive the substantial losses to be warranted. 

App and merchandise sales will be Oculus’s bread and butter, and should make up more of the company’s revenue as VR headsets reach mass adoption and engagement multiplies. Margins on this segment should be comparable to those of Apple’s App Store, with the company taking an estimated 30% cut on all transactions. Oculus also plans to take a 47.5% cut on all virtual asset sales within users’ metaverses. At the beginning of February, Meta announced that $1 billion had been spent in the Oculus Quest Store since its launch in 2019. As depicted above, content revenue is growing exponentially. Similar to Peloton, in which the software has an exceptionally high LTV (lifetime value), a flourishing ecosystem would result in substantial profits. And that, unbeknownst to most investors, is what Meta is banking on. 

Meta’s hardware initiatives extend well beyond VR. In 2018, the company launched Portal, a smart display upon which users can call their friends/family/colleagues and interact with Amazon’s Alexa or Facebook Assistant. Reportedly selling 600,000 in 2020 and 800,000 in 2021, Portal has struggled to compete with incumbents like the Amazon Echo, which sold over 65 million units in 2021. A relatively underappreciated piece of hardware, Portal will be transitioning to a corporate-centric product, as per a Meta announcement, and will cease production of its consumer-facing units. It’s too early to tell whether this could be a promising additional revenue stream, but the concept is invariably intriguing. 

Unveiled in August 2020 and later released in September of 2021, Rayban Stories are Meta’s foray into the AR glasses industry. Augmented reality glasses originated back in 2011 when Google released the unfavorable Google Glass though the concept itself dates back to the late twentieth century. With nearly every accessory we own being increasingly equipped with smart features (watches, shoes, etc.), technologically advanced glasses were inevitable. Augmented reality has already gained considerable traction through its use in smartphones on platforms like Snapchat, Instagram, and even shopping apps. Thus, using it in glasses is merely a natural evolution. 

Likely the main inhibitor of wide-scale adoption of AR glasses (at the moment) is their pricing. Snap’s most recent iteration, the Spectacles 3, costs $380 for its trivial main utility of taking pictures. The earlier editions were even less flattering. Consequently, Spectacles struggled to sell as well as initially predicted, resulting in a $40 million inventory write down for the company in 2017. Nevertheless, Evan Spiegel firmly believes the 2020s will be the decade during which AR glasses achieve mass adoption. Meta’s entrance into the space is unsurprising given its intent to dominate both AR and VR, likely validating Spiegel’s paradoxical statement. 

While Meta has yet to publicly reveal how well its Stories (developed in partnership with Rayban) have been selling, it’s apparent that the company is investing heavily into refining and improving future iterations. Just as Peloton initially produced clothing in combination with Lululemon, Meta’s partnership with Rayban undeniably gave the company a greater understanding of how to produce glasses independently. The benefits of the transitory partnership are apparent for Meta, but not so much for Rayban. If Meta and Snap (and potentially Apple) succeed in their mission of making AR glasses mainstream, Rayban will languish and be superseded unless it acquires/forms an AR division of its own. 

Meta’s original comprehensive AR roadmap planned to release two pairs of glasses by 2024, followed by a second generation in 2026, and a third in 2028. Codenamed Project Hypernova and Project Nazare, with the former being the low-end version and the latter being the high-end version, the initiatives are critical to Meta’s planned escape from Apple and Google’s seemingly inescapable ecosystems. Unfortunately, the company reportedly walked back and delayed plans to release its first generation glasses by 2024 in an attempt to cut costs and preserve capital amid the ad market slowdown. 

The utility of AR glasses - augmented navigation, reading and responding to texts, and a variety of other content that’s overlayed - is becoming increasingly evident and the assertion that they will replace smartphones is not all that radical. Mark, according to a Meta insider, wants the release of the company’s first real AR glasses to “be an iPhone moment”. With Meta being a frontrunner in the space, I’m confident Mark’s prescience and the company’s diligent teams will revolutionize the whole technology industry. 

Envisioning an extensive ecosystem of hardware products, analogous to those of Apple or Google, Meta also intended to release a smartwatch in harmony with the first iterations of its smart glasses. The watch would’ve likely aided with the strenuous computing tasks imposed on the chips within the glasses. Project Hypernova is reportedly going to be tethered to iPhones, but Nazare’s plans are unknown. In June the company halted development of the smartwatch yet still plans to release wrist wearables in the future. 

The numerous project delays shouldn’t dim the brightness of Meta’s tremendous opportunity to become an innovative, disruptive hardware incumbent. Instead of honing in on current technologies (smartphones and laptops) the company has gone all-in on building and more so architecting immersive technologies of the future. With a near-flawless track record of deciphering what’s to come in the years ahead and exercising unparalleled foresight, I’m confident the next two decades will consist of an inflection point during which the scale of the company’s hardware empire surpasses that of its social media empire.

Facebook’s reputation has been tarnished over the past decade, most notably during the infamous Facebook-Cambridge Analytica Scandal and various data breaches. It’s, I suppose justifiably, earned the reputation of being privacy invasive. Facebook’s name switch to Meta in the latter half of 2021 was therefore beneficial for three core reasons: no more polluting of high quality products with the company’s name, paving the way for the company to be so much more than a single platform, and emboldening its intent to be a dominant player in AR, VR, and metaverses. 

Throughout the company’s 22 year history, Mark Zuckerberg has reigned as CEO. Zuck owns over 13% of the company and holds 58% voting power, thus having the final say over critical decisions. Under his leadership, Meta has evolved from a mere digital profiler of Harvard students into one of the world's most powerful enterprises. Evident from his historical success, Mark is one of the most visionary CEOs on the planet and is revered for his prescience. He architected the evolution, even origination of the social media landscape, and plans to do the same with VR, the next form of social interaction. 

The management team he’s constructed is arguably the most competent I’ve ever seen, leading me to believe they’ll be able to effectively navigate the economic downturn ahead and come out stronger on the other side. Sheryl Sandberg’s recent resignation should only be a short-term headwind as new COO Javier Oliván steps in. (A little note about Sheryl: Since her arrival in 2008, she’s helped Meta’s revenue grow from $272 million to $118 billion). Mr. Oliván has been with Meta since 2007, when he joined as Head of International Growth. Mark clearly has an affinity toward early Facebook executives (rightly so) and tends to award them more power. Meta’s CTO, Andrew Bosworth, was one of Meta’s first engineers and the main engineer behind Facebook’s News Feed. As CTO, he’s leading the company’s VR/AR, hardware, and AI initiatives. The numerous interviews of him on YouTube prove that he too is a visionary and a pensive thinker. Here’s a quote of his from 2011:

“For us it’s a microcosm of our entire culture of never being comfortable and never being afraid to throw away what your doing, throw away a really good product, in the pursuit of something great”

A commonality among pretty much every executive is that they attended a top tier university such as Harvard, Stanford, or Yale. Given the company’s scale and popularity, they have access to some of the smartest business and engineering minds in the world. Over the past two decades, Meta employees have cultivated a reputation of being incredibly cunning. The company consistently ranks as one of the best places to work each year and exemplifies Silicon Valley’s aptitude for talent. Meta currently has nearly 84,000 employees, making it one the largest companies in the world. It’s revenue per employee ratio north of $1 million alludes to the exceptional efficiency the company operates with. As long as it’s able to attract and retain top talent, Meta will feasibly set precedents in VR, AR, social media, and the plethora of additional products the company will encompass a decade from now. 

Further analyzing the business quantitatively paints an ever more compelling picture. After an errant earnings report in Q4 2021, Meta shares plummeted, shaving off a fourth of its market cap in a single day. The rationale behind the drop was supposedly a combination of Facebook’s MAUs declining for the first time in history (as mentioned above), earnings falling short, and $10 billion spent over the course of the year on building out its Metaverse vision. From there, the pain persisted and shares continued their precipitous drop. In 10 months, $647 billion evaporated and the company fell from the 5th most valuable stock to the 11th. Since shares peaked close to $400 in September 2021, the company has shed 60% of its value. Even so, its market capitalization of $480 billion isn’t something to scoff at. The intricate details pertaining to what catalyzed the collapse are trivial in the eyes of opportunistic investors, like myself, that see an absolute bargain and tremendous growth for years to come. 

Meta has grown exponentially over the past decade. In twelve years, the company’s revenue has multiplied by 15,177% or a multiple of nearly 152 (from $777 million to $117.93 billion). The presumption that Meta’s days of growth are behind it is ludicrous. Just like numerous other tech companies, the covid-19 pandemic merely pulled forward user adoption and in turn revenue. With incomprehensibly powerful network effects existing among all of its platforms, Meta remains well positioned for considerable expansion. Future catalysts include: continued increasing prominence of Instagram, WhatsApp and Messenger monetization success, accelerating adoption of Oculus VR headsets compounded by enhanced engagement, well-received AR glasses rollouts, other lucrative hardware initiatives, and diminishing effects of iOS 14.5 as AI boosts ad efficacy with less data. 

To expound upon the final catalyst, iOS 14.5 has significantly impacted the entire social media landscape. Released in April 2021, Apple strengthened users' privacy controls, enabling them to limit tracking capabilities of digital advertisers and opt out of data sharing. The change is evidence of the growing animosity between the two companies undeniably going to face off in the VR and AR race for dominance. According to a report from Markets Insider, this “marginal” change erased over $315 billion in market value from Meta, Twitter, Snap, and Pinterest. All so that Apple can incessantly brainwash us into believing their nonsensical mantra: “Privacy. That’s iPhone.” 

Virtually every social media company has seen their share price crater, at least partly attributable to Apple’s policy shift. Meta announced in Q4 2021 that the alteration would shave $10 billion off the company’s top line in 2022, presenting its most challenging headwind. To counteract its effects, Meta has set out “... to do more with less data”, as Sheryl Sandberg put it. Here’s a few more fleshed out thoughts from Meta’s management team pertaining to how they plan to mitigate the effects of iOS 14.5:

“And I think it's pretty early days in our ability to do that. We're going to do it by investing on our own, investing in AI, investing in machine learning. We're going to do it in rolling out products, like we have recently. That help us and advertisers measure where we're sharing less data between, as I talked about in my remarks. But we're also going to do it with our industry because it's worth noting that this is not a challenge we face alone. This is a challenge that anyone that's running on the Apple iOS platform has. And the industry is working together, I think, pretty collaboratively in -- not every player, but in a lot of players, many ways to get solutions.”

- Sheryl Sandberg, COO, Q2 2022

“The AI wave we're riding is a tailwind for all of these solutions. Advances in AI enable us to deliver better personalized ads while using less data. It powers automated messaging and creation tools that let businesses run better performing campaigns -- which is particularly important for small businesses that don't have big marketing departments and that have been hit hard by Apple's policy changes. Overall, there's a lot of work to do here -- and a lot of the investment is in AI compute capex -- but I'm confident that if we invest in building the new infrastructure we need, then we will come out of this downturn with even more superior ad products and a meaningful technology advantage over other industry players.”

- Mark Zuckerberg, CEO, Q2 2022

During the Q2 earnings call, Mark outlined the three core short-term headwinds the company’s ads division faces: (1) Reels now takes up over 20% users’ time spent on the platforms (Facebook and Instagram) while not being monetized as effectively, (2) iOS 14.5 changes, (3) the impending macroeconomic weakness. All three are to blame, as well as foreign exchange losses, for the company’s shaky Q2 numbers, during which quarterly revenue contracted YoY for the first time in the company’s history. 

The bull and bear cases for the company are binary. Bulls believe in Oculus, the eventual traction of metaverses, hardware prominence, an ad revenue recovery/reacceleration, and that the abrupt stock collapse presents an extraordinary buying opportunity. Bears opine the metaverse is inconceivable and a waste of $10 billion a year in R&D, Facebook is dying, and ad revenue won’t recover from iOS changes. Minimal overlap exists between the two standpoints. 

The dilemmas above accompanied by a swift valuation collapse caused by rising interest rates has created an excellent and sizable margin of error on the Meta shares. With a forward GAAP P/E of 17, the company is trading more like a coal stock than the dominant social media and potentially next generation connectivity tools company. All short-term headwinds have been priced in and then some. The TTM price to cash flow of 8 and FWD price to cash flow of 9 allude to how (1) undervalued the company is and (2) irrationally low the future growth expectations are. 

Operational efficiency is apparent. Meta’s 80% gross margin is exemplary and indicative of the brilliant business model they’ve spent nearly two decades refining. The notion that Meta has architected the best model in the world is far from an embellishment: billions of users incessantly post content that the company intertwines with high conversion rate ads. Over the last decade, Meta's free cash flow (FCF) grew from $377 million in 2012 to over $39 billion, compounding at a ridiculous 59% a year. Meta's return on invested capital (ROIC) has swollen from 0.59% in 2012 to 28.08% in 2021, its highest level ever. The EBIT margin of 33% and net income margin of 28% essentially signify that for every dollar of revenue they bring in, a third trickles down to the bottom line as profit. 

With its cash cow, immensely durable ad segment, Meta is feasibly able to fund its efforts in constructing the “next evolution of digital connection”. Woes of decreasing net income are only salient if you believe capital being funneled into the Reality Labs arm is going to waste. For investors thinking in decades, the $10 billion invested a year will ultimately yield yet another near-impenetrable moat for the company. 

Insider ownership of 16% signifies that investors, employees, and executives are largely aligned in their mission (and employees are incentivized to help the company succeed). Mark Zuckerberg clearly has his money where his mouth is, with $60 billion in shares as of the most recent share price of $168.

Commenced in 2016, share buybacks have been a steadily rising percentage of the enormous free cash flow Meta generates. In 2021, the company repurchased $44.5 billion worth of shares at an average price of $325 a share. Somewhat counterintuitively, buybacks have slowed even as the share price has plummeted. Halfway through 2022, Meta has repurchased $14.7 billion worth of shares. 

I see share buybacks as an irrefutable waste of capital, especially for a company in the midst of an existential transition to the next connectivity format: virtual reality. Instead of squandering tens of billions of dollars a year to lessen the total shares outstanding by a few percent a year, that money could be utilized to build out new, novel corporate arms and expand into or pioneer additional industries. The money could even be funneled into the company’s polarizing Reality Labs arm, which has yet to but certainly will undergo an “aha” moment. Once sentiment shifts, shares below $200 will be looked at in retrospect as an utter steal. 

Where the money can’t unfortunately go (at the moment) is into acquisitions, especially during Lina Kan’s obnoxiously strict reign as FTC chair. 

For lack of clarity related to the company’s future cash flows, I have abstained from performing a DCF (discounted cash flow model). What is certain is that Meta’s ads division will invariably be immensely profitable. 

As mentioned in my Alphabet analysis, Meta is a member of the ad triopoly alongside Amazon and Alphabet. Together, the triopoly accounted for an astounding 74% of global digital ad spending in 2021. Meta alone accounted for nearly 24%. I would opine that if you could only own three companies, these would be the three to own. All act as excellent core positions for a growth and innovation centric portfolio. 

Meta is undeniably in a transition period. Growth has slowed as the pull-forward in social media adoption and engagement is realized, the ad market temporarily languishes, and saturation seems plausible over the next decade. Building out a new ecosystem of products with Oculus and the planned AR glasses is merely a defense play. The company’s Family of Apps segment has a deep moat which they hope to recreate in the VR/AR industry (already perceived to have a total addressable market well in excess of $1 trillion by 2030). I believe Meta investors willing to hold for over a decade will be handsomely rewarded, especially if Oculus maintains its commanding VR lead as the industry goes mainstream. Shares purchased under $200 have inordinate potential to multiply.

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