Big-Tech Investment Series: Meta Platforms

Hear, O Israel: The Lord our God, the Lord is one! You shall love the Lord your God with all your heart, with all your soul, and with all your strength.

Deuteronomy 6:4-5

The first five books of the Bible are known as the Torah with Deuteronomy being the last of these books. The primary purpose of the Torah is to establish God’s covenant with Israel and to make the connection to the coming Messiah, Jesus. There are many connections from the Torah to what Jesus said, and this verse is a great example of that. Jesus said the exact same thing in response to the scribes questioning him. Jesus also said that I must deny myself and pick up my cross further solidifying my need to love God with all my heart, soul, and strength, just as was instructed in the Torah thousands of years ago. I cannot do this by myself, and it is only Jesus Christ in me through the Holy Spirit that helps me do this.

Investing clearly isn’t as important as what this verse is getting at. But we can still transfer elements from this verse to focus on – commitment, perseverance, and consistency which are critical in keeping investment strategies maintained. Just as the Torah was meant to guide the Israelites lives, keeping them in union with God, similar guiding principles for investments can be stated and applied. Retail investors must identify their goals and objectives and risk tolerances and commit, persevere and remain steadfast during volatility and uncertainty.

The next company in the Big-Tech investment series is Meta Platforms, Inc. (META).

Key Takeaways for Retail Investors

• META is one of the best Big-Tech companies to invest in for retail investors today offering double-digit annualized mid-term stock price potential.

• While META has dominated the mobile advertising market, the company remains highly one-dimensional as it looks to take advantage of AI and its reality labs opportunities.

• As DAP growth slows, META will increasingly be dependent upon the rate of its ARRP growth over time.

• Like AMZN, META is investing substantial amounts of cash via its capex to support its existing and future businesses; investors should see this as positive versus Big-Tech peers not taking as much risk.

• Broader economic activity should be monitored as META’s stock price will be more sensitive as due to its scale, the company will be impacted one way or the other.

META serves as a great example of what happens when you fall out of favor. It affords retail investors a great opportunity to outperform broader markets. META has been on a tear from the 2022 low point. Since 2022 year-end, META is up over 470 percent, or nearly 220 percent per year. From a valuation perspective, META is now trading close to 20 times operating cash flow per share, which is very reasonable based on Big-Tech peer valuation levels that fall within the 20-25 times range.

META’s revenue growth has been on the decline and clearly this has influenced valuation levels. Since 2022’s negative performance, META has witnessed a return above 20 percent growth during 2024. Expectations for the future will likely see META’s revenue revert towards a 10 percent annualized growth rate, which serves as further justification for the company’s valuation levels remaining where they are today and not substantially expanding further. When it comes to artificial intelligence or AI, one must remember that most Big-Tech plays are not necessarily creating something new, but rather leveraging their monopolized strengths so much of the hype that surrounds them is no guarantee.

Interestingly, META’s margins have remained mostly flat throughout the company’s significant growth over time. This has made the emphasis on revenue performance the focal point for the company’s cash flow valuation prospects and further illuminates why the broader market punished META during 2022 to the degree it did, aside from the broader market downcycle.

Even with META’s purchase of Instagram, the company has generated substantial cash and investments due to its strong cash flow. Only recently has META taken on debt that has been mostly tied to stock buybacks, notably during 2021 and 2022 where stock buyback exceeded free cash flow.

As can be seen, META’s free cash flow has been a little erratic in showing a trending decline as a percentage of operating cash flow. This has only increased in the past couple of years with capex spending still being at 40 percent, while tax paid on stock compensation and principal payments on finance leases have grown towards 20 percent. For retail investors who follow Wallstreet’s definition of free cash flow, I recommend fully understanding both investing and financing impacts to every company’s business to determine free cash flow (aside from investment and traditional financing activities related to loans and notes).

The subject of stock buybacks can be contentious, to say the least. Wallstreet is highly supportive of this tactic as it aligns well with earnings per share estimates as buying back stock during any given quarter can make the estimate or come in over or under. Most growth companies do not buyback stock, and it can easily be seen how META has transitioned to a consistent and serial stock repurchasing company. At the same time, META has instituted paying dividends to shareholders. Many small and mid-sized companies pay dividends south of one percent and can still be labeled as growth stocks. META has joined the Big-Tech club whereas very large companies with AI promises and stretched valuations misleadingly are being valued as such growth options.

While many Big-Tech peers recently covered like Apple, Inc. (AAPL), Microsoft Corp. (MSFT), and Amazon, Inc. (AMZN) have focused on expanding their revenue segments into services and through leveraging their products businesses. META on the other hand has a massive services segment in its Family of Apps advertising and other revenue and is looking at expanding further into the products’ side through its reality labs segment. In any case, retail investors need to recognize that the company is heavily sensitive to its core segment.

To this point, META is extremely dependent upon its daily average persons, or DAPs and average revenue per person or ARRPs. While reality labs and AI continue to be buzzwords that catch attention, the reality is that until META proves otherwise, these two core metrics will continue to be the most significant and important drivers for its stock price and valuation. Since the 2021 peak, DAPs have increased by 13.5 percent and ARRPs have increased by 23 percent. As the rate of growth for DAPs continues to slow, ARRP will continue to become the most important driver for META’s future.

Final Thoughts

During times like 2022, META can be a great short-term investment opportunity. The drop in META’s core metrics is cause for concern, but the last two years have displayed that during a difficult downturn, META can reaccelerate its revenue growth. This is the most important element and takeaway for retail investors as during times of fear or panic, META will revert to a perceived one-dimensional company.

If the broader economy stays in a growth phase, META’s outlook over the mid-term (through 2029) is solid. When modeling DAP and ARRP, META is poised to generate approximately above 10 percent annualized revenue growth. Assuming the company will continue to have a flat operating cash flow margin, and a 20 times operating cash flow per share multiple, META is poised to potentially see annualized stock price performance near 14 percent. For Big-Tech, META is one of the best options at today’s price for retail investors.

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