Meta Earnings Continue to Impress but the Shares Remain Fairly Valued

Senior Equity Analyst

Ali Mogharabi

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Meta's Facebook is the largest social network in the world, with nearly 3 billion monthly active users. 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 firm’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 firm will steadily compile more data, which Meta and its advertising clients then use to launch online advertising campaigns targeting specific users. While utilization of consumer data is under scrutiny, 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 return on investment from these targeted efforts.

We believe Meta 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. The firm’s Facebook app, along with Instagram, Messenger, and WhatsApp, is among the world’s most widely used apps on both Android and iPhone smartphones. Meta is taking steps to further monetize 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, which may increase Meta user engagement even further, helping to further generate attractive revenue growth from advertisers in the future.

Business Strategy & Outlook

We assign Meta a wide moat rating based on network effects around its massive user base and intangible assets consisting of a vast collection of data that users have shared on its various sites and apps. Given its ability to profitably monetize its network via advertising, we think Meta will more likely than not generate excess returns on capital over the next 20 years.

Now that Meta has emerged as the clear-cut social media leader, we believe that its offerings, consisting mainly of Facebook, Instagram, Messenger, and WhatsApp, have strengthened network effects for the firm, where all of these platforms become more valuable to its users as people both join the networks and use these services. These network effects serve to both create barriers to success for new social network upstarts, as well as barriers to exit for existing users who might leave behind friends, contacts, pictures, memories, and more by departing to alternative platforms.

Launched in February 2004, Facebook initially targeted college students and expanded via emails and word of mouth. With more requirements in order to register on the site, we think that most users felt safer to engage with other users from their schools and from other schools, than they did on other early social network websites like MySpace. In addition, the flexibility of choosing which other users would have access to one's profile attracted more users and increased user engagement, which resulted in users spending more time on Facebook and, in turn, an early establishment of a network effect. At the end of the first quarter of 2023, Facebook had nearly 3 billion monthly active users.

Today, we see that Facebook, Instagram, Messenger, and the different features and apps surrounding them have increased user engagement on various devices. Facebook also is slowly becoming an entertainment hub, which helps increase engagement and user time spent on Facebook. Additional apps created by developers on the Meta platform also help maintain users within the ecosystem. According to eMarketer, on average, users are on Facebook and Instagram a combined 65 minutes per day per day posting videos and photos, exchanging messages, making comments, uploading content, liking or disliking other content, and more. This demonstrates the value of the platform to users and its network effect for the firm. 

Outside of network effects, Meta has developed additional intangible assets. Unlike any other online platform in the world, Facebook has accumulated data about everyone with a Facebook and/or an Instagram account. Facebook has its users’ demographic information. It knows what and who they like and dislike. It knows what topics and/or news events are of interest to them. In addition, without the need for cookies enabled on desktop or mobile browsers, and based on the Facebook Login, the firm knows its users’ browsing history on many non-Facebook sites or apps. With access to such data and to billions of photos and videos uploaded by its users, Facebook continues to enhance the social network by offering even more relevant content to its users. This virtuous cycle further increases the value of its data asset, which only Meta and its advertising partners can monetize.

In our opinion, with this type of information about each one of Facebook's nearly 3 billion monthly active users, Meta provides unique and attractive advertising opportunities for advertisers and businesses, which will allow the firm to generate excess returns on capital over time. Meta monetizes such information only by using it to increase the effectiveness of its advertisers’ ads. The company does not sell the data to ad-tech companies or other third parties. The value of such data and advertisers’ willingness to use it is demonstrated by the rapid growth of Meta’s average ad revenue per user during the past five years, which we view as indicative of the price that advertisers pay Meta for ad placement. 

Meta’s large and growing user base and the rich data that it generates help advertisers post more effective ads, in terms of brand awareness, resulting in high return on investment. With higher ROI, more advertisers jump on board, allowing Meta to further monetize the network.

Antitrust enforcement and further regulations pose a threat to Meta's intangible assets, data. However, increased restrictions on data access and usage would apply to all firms, not just Meta. The firm’s large audiences and the continuous consumer engagement are likely to continue to drive demand for Meta ad inventories, although possibly at lower prices.

Meta has also expanded its user base in the growing mobile market, which positively affected the network effect as it became more valuable to advertisers, and resulted in more ad revenue growth. The main driver behind growth in online advertising has been growth in the mobile ad market and the video ad format. Most Meta users are now accessing Facebook and its apps via mobile devices.

While smartphone users in the U.S. spend more time on social networking applications, and more time on Facebook than any other social networking application, users around the world spend more time on messaging apps such as Meta’s WhatsApp. The firm has not monetized WhatsApp, as its attempt with bots was not welcomed by WhatsApp users. Meta is now offering WhatsApp to businesses (WhatsApp Business), which can use the platform to not only highlight various products and services but also as a customer support platform.

Other features, such as sending money and receiving money, have already been added to Meta’s Messenger. By working with advertisers, Meta is also adding a similar click-and-buy feature to photo and video ads, especially on Instagram, where viewers can click on a product they like within the video and get more information about it or purchase it. In the long run, we believe these strategies can further strengthen Meta’s network effect, driven by growth in user base (although at a slower rate) and user time spent on the platform, and businesses having more options on how to market their brands and products.

While not a primary source of moat, we also think that Meta benefits from modest customer switching costs. Although it is easy for customers to sign up and use alternative platforms like Snapchat, departing Facebook and Meta's other owned platforms may cause some friction for users. Facebook users today would lose data, such as posts, pictures, video clips, and contact information, their nearly one hour per day interaction with other users, and much more. Even though many users access more than one social network per day, it does not appear to be at the cost of declining users or user engagements within the Meta ecosystem.

Wide

Economic Moat

Earnings data Q1 2024

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