Meta Looks Better Than You Think

Facebook's parent is trading about half of what it could be worth.

Ali Mogharabi 31 May, 2022 | 4:38AM
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1 Hacker Way

Bulls Say

With more users and usage time than any other social network, Meta provides the largest audience and the most valuable data for social network online advertising.

Meta’s ad revenue per user is growing, demonstrating the value advertisers see in working with the company.

The application of AI technology to Meta’s various offerings, along with the launch of the metaverse, will increase user engagement, driving further growth in advertising revenue.

Bears Say

Meta is a one-trick pony and will be severely affected if online advertising no longer grows or if more ad dollars shift to other platforms like Google, Snapchat, or TikTok.

Despite rapid user growth, many of Meta’s customers may also belong to other social networks, so the company will continually have to fight to capture a user’s time and engagement with its properties.

Regulations could emerge, along with additional moves by Apple, that limit the application and collection of user and usage data or restrict acquisitions, affecting data utilisation.

We Say

Meta’s (FB) stock price has declined significantly over the past eight months as increasing competition and further enforcement of data privacy policies slowed revenue growth and pressured margins. But we think the market is ignoring the high probability that double-digit advertising revenue growth will return on the back of the platform’s network effect moat source, which has helped increase the number of users and engagement on its apps. We believe Meta shares, trading at half of our US$384 fair value estimate, are very attractive.

Meta is the largest social network in the world, with over 3.6 billion monthly active users across its Facebook, Instagram, Messenger, and WhatsApp apps. The growth in users and user engagement, along with the valuable data that they generate, makes Meta’s platforms attractive to advertisers. The combination of these valuable assets and our expectation that advertisers will continue shift their spending online bodes well for the company’s top-line growth and cash flow.

Meta has attracted users and increased engagement by providing additional features and apps within its ecosystem. With more user interaction among friends and family, the sharing of videos and pictures, and the continuing expansion of the social graph, we believe the company will steadily compile more data, which Meta and its advertising clients then use to launch online advertising campaigns targeting specific users. While utilisation of consumer data is under scrutiny by regulators as well as Apple, we think Meta’s large audience size will still attract ad dollars. Growth in Meta’s average ad revenue per user indicates advertisers’ willingness to pay more for ads, as they expect high returns on investment from these targeted efforts.

We believe the company will continue to benefit from an increased allocation of marketing and advertising dollars toward online advertising, more specifically social network and video ads where Meta is especially well positioned. Its Facebook app is among the world’s most widely used apps on both Android and iPhone smartphones. Meta is taking steps to further monetise its various apps, such as providing interactive video ads and tapping into e-commerce. It is also applying artificial intelligence and virtual and augmented reality technologies to various products to create its metaverse, which may increase user engagement even more, helping to generate further attractive revenue growth from advertisers in the future.

Key Proprietary Morningstar metrics

  • Fair value estimate: US$384
  • Star rating: 5 Stars
  • Economic moat rating: Wide
  • Moat trend rating: Stable

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Meta Platforms Inc Class A488.69 USD0.26Rating

About Author

Ali Mogharabi

Ali Mogharabi  Ali Mogharabi is a senior equity analyst for Morningstar.

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