Interesting snippet from FundSmith’s annual shareholder video about Meta (the renamed Facebook) from 43m15s:
Co-managers Terry Smith (TS) and Julian Robins (JR) are bullish on META. TS intriguingly says:
“We own the stock, that [digital advertising] business on a P/E of about 14. Obviously the share price performance has been poor recently, very poor, but it certainly says that we own that digital adverting business pretty cheaply I would suggest at the moment.”
TS highlights META’s advertising brought in revenue of $115b last year that achieved an operating margin of 49%(!). Checking the financials, the margin is indeed $115b/$57b = 49%:
Share price when the video was recorded during March was c$200 (about the same as now) and supported a c$550b market cap. TS’s 14x P/E suggests digital-advertising earnings of $39b, which seems very plausible given the $57b operating profit from digital advertising through META’s ‘family of apps’ (Facebook, Instagram etc).
So quite an average P/E for a fantastic-margin division, but the downside is META’s expenditure on ‘reality labs’, which includes the augmented reality ‘metaverse’.
JR is upbeat about the metaverse:
“If we meet back here in 5 or particularly 10 years time, I think we will probably look back in amusement we thought the metaverse was something weird because I think we will all be living it in then”.
I must admit I did not think JR and presumably TS were the type of investors that liked to invest in such tech:
Last year the ‘reality labs’ produced revenue of $2.2b and incurred losses of $10b. Subsequent Q1 figures showed revenue of $0.7m and losses running at $3.3b, so perhaps $2.8b and $12b annualised respectively.
Questions are I guess: i) how much will META spend on ‘reality labs’ until the division breaks even, and; ii) if ‘reality labs’ profits are eventually forthcoming, will the economics be anything like those of the digital-adverting division?
TS’s P/E of 14 effectively values ‘reality labs’ at a net present value of zero (i.e. all the upfront metaverse investment will eventually be recouped, but excess profits will then not occur). Group net cash and investments at the last count were $44b, so META has plenty of resources to fund ‘reality labs’ for now.
META could always scrap ‘reality labs’, too, which would make the valuation guesswork much easier. Active users of META’s platforms are growing at a mid-single digit pace at present and I am not sure underlying advert income can persistently outpace user growth by some distance over time.
This cursory look suggests META shares do indeed look “pretty cheap” – assuming the ‘reality labs’ one day come good. But is META and its metaverse investment the type of company and situation that have served TS/JR well do date? It certainly does not seem to be in the same bracket as, say, FundSmith favourites L’Oreal and Estee Lauder.