FY 2021
By Manuel Maurício
February 04, 2022
Facebook results came out earlier this week and Mr. Market clearly didn’t like them.
It’s easy to get spooked when one of your stocks comes down 25% in a single day. But is this drop warranted?
Let’s look at the relevant financials and then talk a bit about all that is happening with the business.
I think the first thing that got investors spooked was the decreasing Daily Active Users both in the US and in the Rest of World – especially in the US as this is where the most revenue comes from.
Tik Tok, on the other hand, is estimated to have grown its user base by 8% in 2021 in the USA.
With just slight lower active users, the company was still able to grow the number of impressions and the price of each impression, driving the revenue for the fourth quarter up by 20% to a record $33.7 billion.
Some people find it that Facebook inundates its feeds with advertising, and trees don’t grow to the sky so we should be reaching impression saturation. That’s why the company needs other sources of impressions. More on that later.
For the first time, the company disaggregated revenue by segments: Family of Apps where they include Facebook, Instagram, Messenger, etc; and Reality Labs where they include the VR headsets and all that’s related to the Multiverse.
When we look at the numbers, we see that Facebook is still an App’s business, still a long way from becoming a Virtual-Reality-Metaversy business.
But that doesn’t mean that the Metaverse isn’t making its dent on the financials. Right now it’s just a cash burning pit having burnt $10 billion in 2021, and expected to burn much more cash for the foreseeable future.
An interesting point from the fourth quarter was the huge amount of share buybacks – $20 Billion – after which there are still $39 billion left in the share repurchase agreement to be bought. I hope they’re seizing the current opportunity to max out their share repurchases.
Now that we’ve taken the birds eye view of the financials, let’s dig deeper:
APPLE IS NOT A FRIEND OF FACEBOOK
The recent modifications by Apple regarding App Tracking Transparency (ATT) has impacted Facebook hard this quarter. I’ve been seeing several people complaining about the results that they’ve been getting with Facebook ads as of lately so I guess that real people are feeling it.
And Facebook acknowledges this loud and clear: Apple’s changes have come to hinder both the targeting and measurement of advertising.
And that’s important because Facebook’s whole proposition for advertisers is that they’ll be able to accurately target their audiences with pin point accuracy.
If that’s no more, bye bye Facebook.
Because of this, the management has guided to a first quarter of low growth between 3-11%. This is probably the second reason why the stock came down so much.
Investors knew that Apple’s modifications would hit the business hard, but it seems that they thought that it wouldn’t be as hard.
The good thing about it is that Apple’s changes should impact all social media alike and Facebook, with it’s huge cash flows and investment in Artificial Intelligence and Machine Learning, should be best prepared to tackle the issue and find a workaround.
BUT APPLE IS FRIENDS WITH GOOGLE
According to Mark Zuckerberg, the ATT changes aren’t affecting Google as much as Facebook. In fact, Google is seeing strength in e-commerce, the most hindered vertical for Facebook. How can this be?
Mark states that Apple has double standards and that it has applied these new rules to apps alone and not browsers (hence the name ATT) – thus not affecting Google. You see, Google is reported to pay around $15 billion per year to Apple to be the default search engine on the iPhone so Apple would be shooting its own foot if it were to hinder Google’s search ad results.
This little war goes to show the power that Apple has over any app and also Facebook’s relative weakness.
REELS ARE THE NEW BLACK
Reels are short format videos, just like the ones you can find on Tik Tok. Mark says that people are spending a lot more time on Meta’s platforms watching Reels than anything else.
This is quite ironical. Tik Tok rose to stardom by creating a highly effective mechanism to keep (mostly young) people stuck to a screen. But that mechanism isn’t protected in any way (like a patent). So it was copied by Facebook (and Youtube, and Snap) and it’s now the driving force of engagement for Facebook. It is actually helping Facebook at the same time that it’s stealing the younger crowd.
Right now, as the format ramps up, it doesn’t monetize as well as Feed and Stories because the company doesn’t want to bombard it with ads right from the start, but also because advertisers aren’t yet familiarized with the format. This means that the eyeballs that were previously on mechanisms that monetize well are now on mechanisms that don’t yet monetize well. This represents a headwind in revenue growth.
But it should only be temporary. Mark mentioned that they’ve been here before with Stories and that he’s seeing the product growing very well.
SHOPS
The company continues its efforts to become one of the leading e-commerce players introducing new features such as Checkout within the app, Product Tags, Drops, and Live Shopping.
I still believe this is the greatest opportunity in the short term for the company.
MESSAGING
From Mark’s words, it looks like they’ll be transforming WhatsApp into a Slack or Discord. I’ve questioned myself several times about this before. Why does Facebook allow for Discord (or Tik Tok) to grow? Why aren’t they faster to copy these mechanisms and features before they become such hits?
WhatsApp is also partnering with businesses like Uber to allow for people to book rides directly from WhatsApp. This is interesting as it suggests that they’re making WhatsApp become more like the super apps of Asia.
AVATARS
WhatsApp is also partnering with businesses like Uber to allow for people to book rides directly from WhatsApp. This is interesting as it suggests that they’re making WhatsApp become more like the super apps of Asia.
AVATARS
There’s a running joke on Twitter that the more Zuckerberg talks about avatars, the lower the share price goes. Mark really likes talking about his avatars. That’s how we’ll one day be seen online. And it looks like Meta is taking the steps for it to become cross-platform.
You see, we don’t yet have a ubiquitous online identity. For each platform or service (Facebook, Amazon, etc) we need to write down our name, password, credit card details, and so on. What Mark is trying to create is an universal virtual identity. You set it up once and it will follow you across apps.
Mark mentioned in previous stances that no one company should own our online identities, but it sure seems he’s trying to become the first.
Which leads me to the Metaverse. Facebook is pouring $10 billion per year (and growing) to develop Virtual Reality, Augmented Reality, and the Metaverse.
Investors are wary of that and many see it as a grandiose dream by Mark Zuckerberg.
Conclusion
I understand those who, like João T. Fernandes, think that Facebook is shifting its business model and feel that they didn’t sign up for this. They bought the stock thinking that they were buying an advertising cash cow, not a parallel world developer.
The reality is that Facebook needs to change to survive. The competition for eyeballs is fiercer than ever. Tik Tok, Netflix, YouTube, Discord, Twich, Roblox, you name it. On top of that, the fragility of Facebook in relation to Apple has become undeniable.
Although it’s commonly said that Facebook has network effects and these should drive stickiness thus creating a Moat, Tik Tok has come to show how easily social media platforms can become obsolete if they don’t adapt.
Zuckerberg needs new ways to drive engagement and to reduce his dependency on the hardware and app store providers. So he’s building the Metaverse. How this Metaverse will work is yet to be seen, but at the current valuation of 15x earnings (adjusting for the cash) for a cash flowing monster like Facebook, growing at 20%, we’re hardly paying for the Metaverse.
As a side note, one cannot know what the world will be like in a couple of years and what other technologies might be out there, but if the AR glasses are in any way similar to what they promise to be, they’re going to be HUGE.
Facebook will be kept in the Portfolio as a core long term position.
If you’d like to discuss this stock, you can do it in the FORUM.
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