Meta: Discounted Core Business (NASDAQ:META)

Silhouette of a man interacting with virtual computer graphics


Generations have evolved over the years, and that was only possible through innovations. The changes have made our lives more efficient, safer, and created better living conditions. meta (Nasdaq: Meta) have reorganized their embodiment of innovation to meet next generation needs. However, investors are penalizing Mita’s actions. As a result, the stock is now down 70% from its all-time highs, making it a good time to take a deeper dive.

Data by YCharts

core business

Let’s start by saying that Meta’s core business is far from dead. Although the advertising market is weak at the moment, especially in Europe, it still generates a lot of money. Advertising revenue year-over-year remained stable in all regions except Europe. The consumer market in Europe is currently very weak, and this is also evident in other companies. So it’s no surprise that ad revenue fell 16.3% in Europe as companies try to scale back marketing efforts in the region.

Advertising earnings

Meta Investor Relations Q3 22

However, this does not mean that people use social media less. Meta has been able to increase daily active people and monthly active people on their platforms. This past weekend I visited Barcelona (Spain), where I was able to see social media activity on the metro, trains and buses. Barcelona, ​​known as one of the busiest cities in Europe, uses Instagram, Reels and WhatsApp frequently. By surprise, I haven’t seen anyone using TikTok. AI advancements in measuring recommendation models have increased watch time by 15% for Reels. Hence, I suspect that people are using Reels more and more, as an alternative to TikTok competitor.

daily active users

Meta Investor Relations Q3 22

So, Meta platforms are perfectly fine and Europe is the only real laggard at the moment. Europe is not far behind in terms of the number of active users, but in the revenue earned per user. In the Asia-Pacific region and the rest of the world, ARPU increased year-on-year.

Average revenue per Facebook user

Meta Investor Relations Q3 22

Personally, I still see growth opportunities in the core business. Reels has a good chance of regaining market share from TikTok. Reels are included for Instagram and Facebook, making it an even better all-in-one experience. Moreover, Messenger and WhatsApp monetization is another big opportunity. Meta CEO Mark Zuckerberg said on the Q3 2022 earnings call:

We started with Click-to-Messaging ads, which allow businesses to run ads on Facebook and Instagram that start a message thread on Messenger, WhatsApp, or Instagram Direct so they can communicate with customers directly. This is one of the fastest growing advertising products, with an annual run rate of $9 billion. Most of that revenue is on Click-to-Messenger today since we first got there, but Click-to-WhatsApp has over $1.5 billion run rate, more than 80% year-over-year growth.

Paid messaging is another opportunity that we’re starting to take advantage of, and it continues to grow rapidly but from a smaller base. We’re laying the groundwork now to extend this with key partnerships like Salesforce, which allows all businesses on its platform to use WhatsApp as their main messaging service to answer customer questions, send updates, and sell directly in chat. We also launched JioMart on WhatsApp in India which is our first end-to-end shopping experience that shows the potential of chat-based commerce through messaging.

Between Click-to-Messaging and paid messaging, I’m confident this will be a huge opportunity.

Click-to-Messenger/WhatsApp is growing very fast and may take more percentage of total revenue in the following years.

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Overall, advertising is seeing a temporary slowdown, but this shouldn’t be a bummer for long-term investors, because the underlying business is still going strong.


So far, I haven’t talked about the metaverse business, because it doesn’t matter. Meta trades at 11.65x earnings and 10.71x free cash flow. Even in the COVID-19 crash, the company hasn’t been cheap. The metaverse has a negative impact on PE and PFCF ratios, because it generates negative earnings and needs a lot of free cash flow, and yet those metrics are going down.

So, if Meta’s adventure in the metaverse ends, there are no more negative impacts on earnings and free cash flow, the stock will look more discounted. Likewise, if the metaverse starts generating positive earnings and free cash flow, the stock will also look more discounted. Moreover, the current valuation may be the lowest, Meta is cutting costs, core business is stable and the dollar is strong.

Data by YCharts

In terms of EV-to-EBITDA, only Netflix (NFLX) is close to the Meta rating. Other peers and ad-based companies trade at much higher multiples.

Data by YCharts

In addition, Meta’s free cash flow return is much better than companies like Alphabet (GOOG) and Apple (AAPL). So, the Meta looks discounted based on the fundamentals. One might argue that Apple, Microsoft (MSFT), and Alphabet are higher quality companies that deserve a more premium rating. However, the contrast between them is too great for me to consider in this argument.

Data by YCharts

Finally, Meta’s fluidity matches Apple’s. The balance sheet makes it possible to make investments or to give back to shareholders through buybacks. Meta is actively buying back shares, yet the company still holds 14% of the current liquid market value. Snap (SNAP) and Pinterest (PINS) cash and short-term investments are hard to compare with those of the big companies.

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Data by YCharts
Data by YCharts


I’ve always had this thought. That everything that is unknown is difficult to understand until it becomes true. Trying to imagine what lies beyond the known boundaries of the universe is a very difficult exercise. What creatures could be there? Your mind will flood with images you have seen in the past; But can’t there be something new that has never been seen before? Something even your mind struggles to conceive…

There … It is called innovation. Innovation is a broad term that refers to the implementation of a new product, service or process. As investors, we’re wary about this term:

Because the profits that companies can earn are limited, the price that investors must be willing to pay for a stock must also be limited – Benjamin Graham.

The metaverse is accounted for almost entirely in the stock price. Not to the upside, but to the downside. Investors assume nothing will come out of the Metaverse, and for that reason, the stock could be a great opportunity. As we know, lower share price reduces risk and creates higher potential return. The stock is now down 70%, which means the stock is less risky than it was at higher prices. Therefore, I would say the margin of safety on Meta is great at today’s price.

However, if the metaverse can somehow generate some positive free cash flow, the stock price could see some promising returns. And as a matter of fact, the metaverse looks completely realistic. Learning through vision and physical practice are the best ways to improve your skills. Globalization can be more efficient than the current Internet of Things we have now. In addition, there is still room for growth in productivity. People want progress, something better, more efficient, compact, etc… If these things were available, they wouldn’t be bought in no time.

However, I agree that Meta’s narration wasn’t the best. It is very important to understand that the metaverse is not only similar to virtual reality, but also to augmented reality. Unlike virtual reality, which creates an entirely artificial environment, augmented reality users experience a real environment with created perceptual information superimposed on top of it.

Personally, I see more real-world use in augmented reality. Right now, deaf people finally have the chance to create meaningful conversations through augmented reality glasses. The glasses can transcribe spoken language into translations that appear in the glasses.

Right now, I’m typing this article on my computer with a second monitor. But with the Meta headset, you can have as many screens as you want and even choose where to place them with augmented reality. Furthermore, monitors can have touch screen functionality to increase productivity. Space and cable management will no longer be an issue.

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Metaverse chipset

meta – site

This innovation isn’t all magic, the company is spending billions of dollars on the project, which is sucking up a lot of free cash flow. However, it’s important to know that Meta spending isn’t just for the metaverse. Meta is in a new investment cycle to improve infrastructure, expand AI capacity and increase online data center capacity. In the third quarter, Meta spent $4 billion on Reality Labs, and the rest went to other parts of the business. For example, advances in artificial intelligence have increased Reels watch time.

Free cash flow

Meta Investor Relations Q3 22

Meta collaborates with companies like Microsoft, Adobe (ADBE), Autodesk (ADSK), Zoom (ZM), Accenture (ACN) and many more to create new solutions and applications on metaverse devices.

Investing in a startup is very risky because the company makes no money, burns money, and dilutes shareholders. In the environment of rising interest rates, it is not as easy as before to obtain capital. Thus, savvy investors should avoid it. However, Meta has the capital, infrastructure and strong core business to make this metaverse startup work.


The downturn in the advertising cycle combined with the towering investments makes the Meta a scary place for investors. It is now difficult to model the company by numbers and business analysts are obscured.

However, the Meta business has been around for nearly two decades, has a strong core business with 2.93 billion daily users and doesn’t undercut shareholders (actually in reducing the number of outstanding shares). Do you really mind inventing them to cater to the next generation?

Certainly, free cash flow for several years will suffer from higher investments. But better returns may soon emerge in the Reels, Messenger and WhatsApp segments, since the core business isn’t out of focus. A weak advertising market and dollar headwinds are temporarily overshadowing the quality of business.

In my opinion, investors are very pessimistic. So I see value in Meta. The balance of risk and reward is appropriate at current prices. I will say that Alphabet offers me a much safer deal with less risk and a similar reward. Always remember that you have to find an investment that works for you.

I’m rating Meta a Buy. If the share price drops below $100, it has been revalued to a Strong Buy.

Let’s finish with a thoughtful Carl Jung quote:

The creation of something new is not done through the mind but rather through the instinct to play which works from inner necessity. The creative mind plays with the objects it loves.


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