thesis on goal
From target (NASDAQ: META) announced that it is going to invest heavily in the Metaverse at the end of last year, the company’s stock price has dropped over 71% and is still falling.
goal has has been one of the most controversial companies of the last year and with many investors believing that it is not only losing market share to TikTok but also having problems with Apple (AAPL) Changes in iOS 14, the stock price is now trading at around $100 and ridiculous multiples.
Third quarter results
After the social media company revealed a second straight quarter of declining revenue, a poor growth outlook and rising costs in its loss-making section of the metaverse, shares of Meta plunged more than 20% a few weeks ago, reaching its lowest level since 2016. Despite continuing its development, Facebook parent company Meta has lost $677 billion in market value this year.
Notably, in the most recent quarter, Meta’s sales and earnings fell 4% and 52%, respectively, as it faced increased competition from TikTok, a slowdown in ad spending, and the effects of tracking adjustments. of Apple ads.
Additionally, the company’s Reality Labs arm, which focuses on the metaverse, has lost $9.4 billion so far this year, and it predicted that losses there will increase substantially in the future.
All this has led many shareholders to sell the company’s shares even at a loss to avoid worse.
Growth is negative by choice
Meta expanded revenue by 37% in 2021 and Covid was largely responsible for Meta’s ability to expand at such a rapid rate. Every company had to promote itself online during the lockdown, which increased the demand for Meta’s service. Because there was such strong demand, not only did the cost per ad increase, but the company also started running more ads. Both combined made revenue skyrocket. However, this is no longer the case as people are leaving again, so it is normal for the company to see a reduction in revenue in the short term as a result of the rapid drop in demand for its service, but this does not mean that the company is dead.
Despite what many investors think about Meta, I believe that if the company wanted to, it could manage to grow its revenues at a decent pace, even in the last quarter. I think the reason this didn’t happen is that Meta is not currently focusing on revenue growth as they want to gain market share on reels.
Meta is really pushing reels to compete with TikTok and it’s working.
Some statistics What makes me believe that the reels are going to be Meta’s secret weapon are:
- In 2022, Instagram Reels has an average engagement rate of 1.95%, which is at least double compared to the other post types.
- Also, while regular videos have an average view rate of 1.74%, Instagram Reels have an average view rate of 2.54%.
- According to the data, the average reach rate of Instagram Reels in 2022 is 20.59%.
- goal starts to share your income of reels with some creators. According to executives of the media companies participating in this scheme, Instagram pays media companies for uploading Reels that exceed specific viewing criteria. These payments to media companies are different for each account, but are capped each month and mostly depend on how many views an account’s Reels receive. In my opinion, this is the most powerful weapon that Meta possesses against the competition, as now content creators not only earn money from customers who bought their products through a reel they posted, but they also earn money just for publish and create new content for the platform and they therefore have one more reason to prefer Instagram.
Given the impressive rate at which Reels are projected to grow, they will surely have the opportunity to help Meta in the future improve their metrics and expand their presence in the ever-expanding short-form video segment.
And the corporation is not running ads on them yet. Once they start running more ads, I think this could easily become a $10-$15 billion industry that is expanding rapidly. Imagine the impact on the stock price if the company were to generate an additional $15 billion in revenue over the next three years from a high-margin industry.
But investors are also concerned about the company’s declining profits and wonder if these investments that boost the company’s capital expenditures are going to lead anywhere.
Two or three years ago, Meta had operating margins above 40%, but now, as capital expenditures have grown so much, this number has dropped to 20%. But while this is disappointing, it was not unexpected as the company’s management had at least warned investors that the company would invest heavily in its future and that would affect its current margins. What most investors don’t know is that these expenses aren’t just due to Reality Labs. Meta is also investing to develop better algorithms and combat the problem brought about by Apple’s new IOS changes. The concept is that if before the update users spent two or three hours a day and now the company finds a way to keep them busy for another hour, it will be able to collect more data from them and thus display it better and more efficiently. The problem is that in order to build that superior algorithm that will bring these results, the corporation requires a stronger infrastructure, which will cost a lot up front but will lead to higher revenues and profits in the long run.
Overall, the company is investing in its future rather than its current products, so higher capital expenditures shouldn’t be a major issue.
The only problem here would arise if the corporation continued to invest billions of dollars in its own operations without achieving faster growth. Fortunately, this is not what analysts predict will happen to the company; instead, they predict that over the next five years, growth will hover between 6% and 12%.
After the latest earnings report, I can say that I have no idea if the company’s share price could fall further or have bottomed out.
However, what I think is that the current price that it is currently trading at is a ridiculous valuation for such a large company with this type of moat. Although some investors see the company as doomed, I believe it has more to offer and that when the investments it is currently making finally pay off, the stock price will rise back to all-time highs.
That’s why I think Meta is a bargain now, and I rate it a BUY.