Equity Research Report: Meta Platforms Inc.

Universidade do Minho Escola de Economia e Gestão João Carlos Ribeiro Pinto Equity Research Report: Meta Platforms Inc. December 2024 Equity Research Report: Meta Platforms Inc. João Carlos Ribeiro Pinto UMinho | 2024 Universidade do Minho Escola de Economia e Gestão João Carlos Ribeiro Pinto Equity Research Report: Meta Platforms Inc. Projeto de Mestrado Mestrado em Finanças Trabalho efetuado sob a orientação do Professor Doutor Nelson Brandão da Costa Areal December 2024 ii DIREITOS DE AUTOR E CONDIÇÕES DE UTILIZAÇÃO DO TRABALHO POR TERCEIROS Este é um trabalho académico que pode ser utilizado por terceiros desde que respeitadas as regras e boas práticas internacionalmente aceites, no que concerne aos direitos de autor e direitos conexos. Assim, o presente trabalho pode ser utilizado nos termos previstos na licença abaixo indicada. Caso o utilizador necessite de permissão para poder fazer um uso do trabalho em condições não previstas no licenciamento indicado, deverá contactar o autor, através do RepositóriUM da Universidade do Minho. iii Statement of Integrity I hereby declare having conducted this academic work with integrity. I confirm that I have not used plagiarism or any form of undue use of information or falsification of results along the process leading to its elaboration. I further declare that I have fully acknowledged the Code of Ethical Conduct of the University of Minho. iv Disclaimer This Equity Research Report was prepared for academic purposes only by João Pinto, a student of the Master’s in Finance at the University of Minho. The report was supervised by a faculty member acting merely as an academic mentor. Neither the author of this report nor the supervisor are certified investment advisors. This report should be read as a pure academic exercise of a master student. The information used to produce this report is generically available to the public from different sources and believed to be reliable by the student. The student is the sole responsible for the information used in this report, as well as the estimates and forecasts, application of valuation methods, and views expressed. The UMinho and its faculty members have no unique nor formal position on those matters and do not take responsibility for any consequences of the use of this report. v Acknowledgements In the first place, I would like to express my deepest gratitude to Professor Nelson Areal. Your guidance, supervision, and patience have been crucial throughout the development of this project. Also, your mentorship and expertise had a huge impact on my work and academic growth and I am very happy to conclude this project with you as my supervisor. I am forever indebted to my family, especially my parents, for their unconditional love and support over my academic journey. Your belief in me and their support, especially during the most challenging moments, is the main key for my perseverance and success and I feel very special to have you in my life. To my friends, thank you for your constant support, encouragement and faith in my abilities. Your companionship and unwavering support have been a great source of motivation through this journey, and I am truly grateful to have such special people in my life. I am very thankful to share this path with you. I would also like to extend my sincere appreciation to all the professors involved in the Master's in Finance program at the University of Minho. The knowledge, insights, and practical skills imparted by each of you have been invaluable in preparing me for both academic and professional endeavors. Lastly, I am grateful for everyone who has contributed to my academic and personal development through these two years. Your support, in its many forms, has made this achievement possible. vi Resumo Este trabalho acadêmico consiste num Equity Research Report sobre a empresa Meta Platforms Inc., elaborado em conformidade com os padrões de pesquisa estabelecidos pelo CFA Institute. Importante referir que a informação utilizada para a condução deste projeto refere-se exclusivamente a dados publicamente disponíveis até 1 de fevereiro de 2024. Toda a análise foi baseada unicamente em informações até essa data, sem levar em consideração desenvolvimentos ou eventos subsequentes. O objetivo deste relatório é conduzir uma análise aprofundada da Meta Platforms Inc., incluindo uma avaliação do desempenho financeiro da empresa, a sua posição competitiva, perspetivas de crescimento, bem como outros fatores relevantes que possam influenciar o valor intrínseco das suas ações. Estabelecendo-se na última década como um dos gigantes na indústria da tecnologia e redes sociais, a Meta Platforms, Inc. oferece nos dias de hoje serviços para quase metade da população. Com uma capitalização de mercado superior a 1 trilião de dólares, a empresa continua a impulsionar a inovação e o desenvolvimento, aprimorando os seus serviços e acompanhando o rápido crescimento da indústria. A avaliação baseia-se em três abordagens distintas: o método dos fluxos de caixa descontados, a avaliação relativa e o método dos dividendos descontados, estimando os componentes financeiros da empresa para um período de dez anos. Com base na análise realizada, a recomendação de investimento para a empresa é de compra, com um preço alvo de 543,71 dólares até ao final de 2024, refletindo uma potencial valorização de 12.69%. vii Abstract This academic work consists of an Equity Research Report on Meta Platforms Inc., prepared in accordance with the research standards established by the CFA Institute. It is important to note that the information used for this project is based exclusively on publicly available data up until February 1, 2024. All analysis was conducted solely based on information available until this date, without considering subsequent developments or events. The purpose of this report is to conduct an in-depth analysis of Meta Platforms Inc., including an evaluation of the company's financial performance, its competitive position, growth prospects, as well as other relevant factors that could influence the intrinsic value of its shares. Over the past decade, Meta Platforms Inc. has established itself as one of the giants in the technology and social media industry, currently providing services to almost half of the global population. With a market capitalization exceeding 1 trillion dollars, the company continues to drive innovation and development, improving its services while keeping pace with the rapid growth of the industry. The valuation is based on three distinct approaches: the discounted cash flow method, relative valuation, and the discounted dividend model, estimating the company’s financial components over a ten-year period. Based on the analysis conducted, the investment recommendation for the company is a buy, with a target price of 543.71 dollars by the end of 2024, reflecting a potential upside of 12.69%. 3 0 2 4 6 8 10 12 14 16 18 20 2021 2022 2023 Revenue in millions Costs and expenses 0% 10% 20% 30% 40% 50% 60% -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2021 2022 2023 Income/loss from operations in M Growth % 01000 2000 3000 WhatsApp WeChat Messenger Telegram Snapchat 01000 2000 3000 WhatsApp WeChat Messenger Telegram Snapchat Figure 6 -Most popular global mobile messenger apps as of April 2024 (Statista) Figure 7 – Reality Labs Revenues and Costs and expenses (Source: company 2023 annual report) Figure 8 - Income/loss from Reality Labs (Source: company 2023 annual report) extensive in several text, audio and video communication methods across different platforms and devices. Meta is a leader in the Messaging App field, leading with a huge difference from the competitors having two of the three most used Apps (Figure 6). WhattsApp WhatsApp has been an integral part of communication across the globe, and is often praised for its ease of use, functionality, and enhanced security. This messaging application has gained commendable attention from individuals and enterprises across the continents as its use in holding safe and secure private and business conversations and even carrying out transactions has proved to be indispensable. The company is a leader in Messaging Apps in 2024 (Figure 6). REALITY LABS The other division of the organization, Reality Labs, is concerned with the creative advancement of virtual and augmented reality research and technology. In line with the broader vision of the Family of Apps, Reality Labs aims to transform the very essence of human connections by allowing people to overcome space barriers in a bid to create a whole new level of interaction and engagement. With advanced VR hardware, cutting-edge software, and compelling content, the division is committed to empowering individuals to feel deeply connected, irrespective of time and place. The revenue from this division is generated from the delivery of consumer hardware products, related software and content. Currently, this division is experiencing notable unprofitability, characterized by modest revenues that constitute a minimal share of the total income, coupled with elevated operating costs. The company had reported a $16.1 billion in operation losses in 2023 on this division, surpassing the value presented on the previous year 13.17$ billion. The revenue of this division, as already mentioned, is almost insignificant when comparing these values. The company has consequently presented drops on this project revenue from $1.89 billion in 2023, $2.16 billion in 2022 and from $2.27 billion in 2021 (Figure 7). Investors are expressing some concern over this particular division due to alarming figures, particularly in terms of operating losses and the substantial investment projected. Discerning how the organization intends to recover or earn returns from these investments proves to be alarming to the investors. The organization might be called upon to give a more strategic and transparent route in order to highlight the projects to investors as not only viable in the short term but also in the long-term addressing some concerns and presenting a clear pathway profitability 4 41% 27% 23% 9% Other Institutional Investors Mutual Funds Public Companies Insiders (Including Management) Figure 9 - Company Board of directors Structure (Source: company 2023 annual report) Figure 10 - Meta Ownership (Source: Tipranks) Figure 11 - "How Meta got over Silicon Valley’s disdain for dividends." (Source Financial Times) COMPANY STRUCTURE MANAGEMENT Meta Platforms adheres to a centralized functional organizational structure, where Mark Zuckerberg assumes the position of the highest authority, overseeing the board of directors (Figure 9). In collaboration with his executive team, Mark Zuckerberg actively shapes the overarching vision and product strategy for Meta, placing particular emphasis on the continual advancement of services, technology, and infrastructure development. This leadership approach ensures a cohesive and focused direction for the company under Mark Zuckerberg's guidance. SHAREHOLDER STRUCTURE As per the form 10-K of December 2023, the company has reported a total of 2,200,048,907 outstanding shares of class A common stock, each representing one vote per share. In terms of ownership distribution, Institutional Investors held the majority stake at 67.80%, with Mutual Funds contributing 27.34% and Other Institutional Investors accounting for 40.46%. Individual Investors and Public Companies collectively owned 22.94%, while Insiders, including management, held a modest 9.25%. In addition, Meta had 349,356,199 shares of class B common stock outstanding, each representing 10 votes per share. This class of stock is predominantly owned by key figures such as Mark Zuckerberg, Meta's management, and directors. The ownership structure of class B shares affords Zuckerberg and his management team effective control of the company, ensuring a concentrated and influential decision-making capability. SHARE REPURCHASE PROGRAM Started in 2017, Meta have launched the share repurchase program with no limit to the shares, cash or period of time in which the program was implemented. As of December 31, 2023, the repurchase amount available and authorized was $30.93 billion dollars. Therefore, the company also declared an additional $50 billion share repurchase program for 2024, which amounts to nearly five percent of the shares in circulation using Meta one trillion-dollar valuation as an example. This substantial repurchase authorization is an indication of the soundness of the firm’s financial capacity over the years; as the firm’s ability to generate cash has been strong. Such share repurchase programs are generally positively regarded by the investors as they can help increase the share price when the number of shares in circulation is reduced thus helping in increasing earnings per share. DIVIDEND The company for the first time ever will distribute dividends in 2024. The CEO has announced in the last quarter of 2023 results that the company will distribute 50 cents in the first quarter of 2024 and intends to continue to distribute dividends on a quarterly basis, depending on market conditions. 5 0 50000 100000 150000 200000 250000 2019 2020 2021 2022 2023 Property, Plant & Equipment Total Assets 97% 3% Weight of Equity Weight of Debt 0 20000 40000 60000 80000 100000 120000 140000 160000 2019 2020 2021 2022 2023 PPE Revenues Figure 12 - Meta capital structure (Source: company 2023 annual report) Figure 13 - PPE to revenues (Source: company 2023 annual report) Figure 14 - PPE to total assets (Source: company 2023 annual report) Susan LI, the company CFO had told analysts, during the earnings call, that this move will allow the company a more balanced capital return program as well as more flexibility in the way the company is able to return capital in the future. This type of measure is generally well-regarded by investors, as usually it is a strong indicator of the company's good financial health CAPITAL STRUCTURE Meta boasts a robust and affluent capital structure. Up until 2022, the company stood out in the S&P500 as the sole entity without any debt. However, in 2022, Meta for the first time has strategically issued $10 billion in debt, increasing in 2023 to $18.99 billion of debt. Despite this move, the company continues to exhibit an exceptionally positive financial ratio with a book value debt-to-equity ratio of approximately 3% (Figure 13). The financial ratios point towards a robust and sound company structure for Meta, indicating a lack of excessive risk and providing no evident cause for concerns regarding solvency. As of now, there's no compelling evidence suggesting significant changes in the capital structure in the near future. Our assumption is that the growth of operating lease liabilities will likely align with revenue increases, while the gradual repayment of long-term debt is expected over time. Historically, Meta has not heavily relied on debt financing, primarily because the company, being a robust generator of cash, didn't find it necessary. Instead, Meta achieved impressive growth by utilizing its substantial cash reserves and equity to finance various investments and initiatives. This strategic approach has contributed to the company's financial health and has been a key factor in its remarkable growth trajectory. INVESTED CAPITAL The company has adhered to its historic strategy of increasing their Property, Plant, and Equipment (PPE) by investing in servers, network assets, and new constructions to accommodate its growth, reaching a PPE value of $143 billion in 2023. Over the past five years, the company's PPE has averaged 88.63% of its revenue. Notably, in the last two years, PPE values have exceeded revenues, as we can see per Figure 13. The figure 15 shows that PPE has been occupying a larger share of total assets over the time. This trend reflects the company’s strategy focus and growing investment in this area. In 2023, the company reported $28.1 billion in capital expenditures, with expectations for the next year ranging between $30 billion and $37 billion. The forecasted growth is attributed to investments in servers, including both AI and non-AI hardware, as well as data centers, to stay ahead of industry innovation previously announced on previous reports. Our forecast predicts that capital expenditures will continue to increase throughout the period due to the ongoing need for industry innovation investment and further investments in the metaverse. 6 -10% 0% 10% 20% 30% 40% 50% 0 20 000 40 000 60 000 80 000 100 000 120 000 140 000 160 000 17 18 19 20 21 22 23 Revenues Growth % Figure 15 - Revenues performance (Source: company 2023 annual report) Figure 16 - "Apple's $12 billion strike to Facebook is suddenly taking shape." (Source Forbes) FISCAL POLICY While the tax figure grew from $1.497 billion in the year 2022 to $2.791 billion in the year 2023, the effective tax rate reduced from 24% to 17% in the course of the period. The corporation anticipates that the overall statutory tax rate shall hover within the range of mid-teens in the year 2024 barring any change to the current regime of taxation in the United States. With the elections drawing closer, it is necessary to weigh what influence or impact both parties can have on the company performance taking into account particularly the fiscal policy. A Democratic win could result in an increase on the corporate tax over the coming years, which may affect the company profitability and strategic planning. DYNAMIC OVERVIEW REVENUES Meta has shown astonishing revenue growth every year since its inception, crediting most of its performance to the increase in the customer base. This growth has enabled the company grow and to become a leader on their industry, being responsible for a huge portion of the market capitalization in the advertising industry. The organization recorded a 23.74% Compound Annual Growth Rate (CAGR) during the period of 2017 to 2021. This is indicative of many years of stable growth and substantial market leadership. However, in another historic feat, the company also suffered a collapse in its year-over-year revenues for the very first time in the year 2022. This downturn can be primarily attributed to the following key factors: (ATT): The introduction of App Tracking Transparency by Apple, enables users to deny permission for app tracking, which in turn affects the company’s ability to run performance advertising. Conventional forms of revenue-generating targeted advertising have been disrupted thanks to this policy change, and this has strained the firm revenues. Competition from TikTok: The meteoric rise of TikTok has reshaped the social media landscape, posing a formidable challenge to established platforms. TikTok's rapid ascent to prominence has diverted user attention and advertising spending away from other platforms, including the company in question, thereby affecting revenue growth. Declining Growth Rate of Family Monthly Active Users (MAUs): The growth in the Family Monthly Active Users (MAUs) has been on a downward trend for some time now which has limited the growth of the company’s user numbers as well as the increase in revenues. This segment of the population is particularly significant for nurturing involvement and ensuring proper spending practices in the future, while its slowdown in growth has hampered the firm’s ability to turn in revenues. 7 0 5000 10000 15000 20000 25000 30000 35000 40000 2019 2020 2021 2022 2023 Cost of Revenue Research and Development Selling, General & Administrative Expenses 0 20000 40000 60000 80000 100000 120000 140000 160000 2019 2020 2021 2022 2023 Total costs Revenues Advertising Reality Labs & Other Revenue Figure 17 - Revenues structure (Source: company 2023 annual report) Figure 18 - Meta total costs evolution (Source: company 2023 annual report) Figure 19 - Total cost to revenues (Source: company 2023 annual report) Recession in the Advertising Market: The overall level of advertising demand seems to have dropped due to high inflation, war tensions, fuel crises in many countries of the world, which led to cuts in expenditure on advertising, and this has also led to reduced Revenues. Downturn in the availability of advertisement real estate e or advertisement services has limited the capacity of the firm to generate revenues. For this remarkable historical return to growth, growth has been a year on year of 16% in the year 2023 with revenues at $137.90 billion. Most of this growth can be attributed to the growth of FoA monetization while revenue from the Metaverse has continued to decline moderately. As per the table below we can see the contribution of both streams of revenue of the company. As mentioned before, Advertising is the main source of revenue with a significant percentage, making the contribution of “Reality Labs & Other Revenue” almost irrelevant. COST STRUCTURE The costs of the company were divided into three segments: 1) Cost of Revenue refers to the expenses directly associated with producing goods or services sold by a company. This typically includes the costs of raw materials, labor, manufacturing overhead, and any other expenses directly tied to the production process; 2) Research and Development (R&D) expenses represent the investment made by a company into activities aimed at creating and enhancing products or services. This includes the costs associated with scientific research, technological innovation, and product development efforts and 3) Sales, General, and Administrative (SG&A) expenses encompass the various costs incurred by a company that are not directly tied to the production of goods or services. This category typically includes expenses related to sales, marketing, administrative functions, and overhead costs necessary to support the overall operations of the business. As per the Figure 18, it's evident that all segments have grown proportionally with revenues over the last five years. Within the SG&A segment, there was a notable acceleration in growth in 2019 and 2022, attributed to unexpected expenses during those years. To mitigate rising costs, the company announced a strategic initiative in November 2022, which involved a reduction in workforce by approximately 11,000 employees and the implementation of a hiring freeze until 2023. These measures were intended to streamline operations and reduce expenditure. However, it's crucial to recognize that the effects of these actions will not be immediate. The company plans to offer a severance package consisting of 16 weeks' pay, with an additional two weeks for each year of service, along with providing all remaining accrued time off and maintaining health insurance coverage for six months. As a result of these initiatives, the company successfully halted the growth of SG&A expenses, reporting nearly $23 billion in 2023—a decrease of 10.5% compared to 2022. However, we anticipate that SG&A expenses will increase 8 0% 5% 10% 15% 20% 25% 30% 35% 40% 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 100000 2019 2020 2021 2022 2023 Total costs Growth % 0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0% 80,0% 90,0% 2019 2020 2021 2022 2023 Gross Profit Margin - % Operating Margin - % EBITDA Margin - % Net Margin - % 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% 2019 2020 2021 2022 2023 ROE (1) ROA (2) ROIC Figure 20 - Profitability ratios evolution (Source: company 2023 annual report) Figure 22 - Profitability ratios evolution (Source: company 2023 annual report) Figure 21 - Efficiency ratios evolution (Source: company 2023 annual report) over the forecast period, as we believe the company will need to continue investing to stay competitive. PROFITABILITY Figure 20 shows the evolution of the profit margins of the company since 2019. When compared to 2019, all the ratios have declined, with a large decrease noted in 2022, due to high cost related to the metaverse. Throw Figure 23 we are able to assume that the company has improved their efficiency ratios when comparing to 2019. However, these values did not grow constantly with values fluctuating from year to year. Figure 22 mirrors the trend observed in Table 1, showing that all ratios were lower in 2023 compared to 2019. A notable aspect of these ratios is their evolution from 2022 to 2023. In 2022, the company reported poor results, leading to a loss of investor confidence. However, this was swiftly reversed in 2023, with all ratios showing significant improvement. 2019 2020 2021 2022 2023 Profitability Gross Profit Margin % 81,9% 80,6% 80,8% 79,6% 80,7% Operating Margin - % 41,0% 38,0% 39,7% 28,8% 37,2% EBITDA Margin - % 49,1% 46,0% 46,4% 36,2% 45,5% Net Margin - % 26,2% 33,9% 33,4% 20,2% 29,4% Efficiency ROE (1) 20,0% 25,4% 31,1% 18,8% 28,5% ROA (2) 16,0% 19,9% 24,2% 13,4% 19,1% ROIC 19,9% 25,3% 31,0% 17,7% 25,6% Valuation P/E 31,93 27,07 24,43 13,80 23,46 P/S 8,35 9,18 8,15 2,79 6,90 P/B 5,79 6,07 7,38 2,50 5,92 Table 1 - Valuation, Efficiency and Valuation ratios evolution ratio (Source: company 2023 annual report) 2023 Companies: META GOOGL AMZN Gross Profit Margin - % 80,7% 56,9% 46,8% Operating Margin - % 37,2% 28,7% 6,4% EBITDA Margin - % 45,5% 32,5% 11,8% Net Margin - % 29,4% 24,6% 5,2% Efficiency ROE (1) 28,5% 28,1% 17,4% ROA (2) 19,1% 19,7% 6,1% ROIC 25,6% 26,0% 12,3% Valuation P/E 23,46 23,42 77,87 P/S 6,90 5,78 4,30 P/B 5,92 6,20 5,89 Table 2 - Valuation, Efficiency and Valuation ratios comparation with competitors (Source: Refinitiv Eikon) 9 0,00 5,00 10,00 15,00 20,00 25,00 30,00 35,00 2019 2020 2021 2022 2023 P/E P/S P/B 0% 5% 10% 15% 20% 25% 30% 35% 0 200 400 600 800 1000 1200 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Ads spending growth 0,00% 1,00% 2,00% 3,00% 4,00% 5,00% 6,00% 7,00% 8,00% 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Figure 25 - Ads spending evolution and forecast (Source: Statista) Figure 24 - US historic inflation (Source: Trading Economics) Meta presents a unique business model, making it challenging to find suitable peers for comparison. However, core business comparability between Meta and Alphabet (GOOGL) comes out as strong from the following table. Meta reported very strong profitability ratios in 2023 with numbers across the board coming in higher compared to GOOGL. Both companies hared a very high level of similarity with their efficiency and valuation ratios being very similar. INDUSTRY AND MACROECONOMIC OVERVIEW MACROECONOMIC OUTLOOK The overall outlook for growth on a global scale is perceived to be consistent with the forecasts suggesting a 3.1% growth in 2024 and a slight improvement to 3.2% in 2025. Nonetheless, such activities may be hampered by high central bank rates designed to fight inflation and a tapering of government spending over worries of high debt. Notably, inflation is declining more rapidly than anticipated in most regions, attributed to the resolution of supply-side issues and the implementation of more restrictive monetary policies. An encouraging aspect is that, with the accelerated disinflation, there is a potential upside for companies as financial conditions could improve, fostering innovation and encouraging investment. The positive projections extend to global headline inflation, which is expected to decrease from 5.8% in 2024 to a further decline to 4.4% in 2025. The same trend occurs on the projections of US inflation rate, with the average consumer price inflation to be around 3.2% in 2024 and 1.9% in 2025. DIGITAL ADVERTISING INDUSTRY Digital advertising is the dynamic practice of promoting products or services across online channels. The securing of ad placements has opened numerous opportunities in the promotion of products or services through leads generation and sales enhancement using appropriate measures, all with an aim of increasing the online traffic. Nowadays, we stay in an age where internet connectivity has become a norm in that human beings even use the internet for research, leisure and even socializing with the others. Such a habit of using digital media is not only a feature of our everyday life but also plays a significant role in the growth and development of the Digital Advertising Industry along with the passing of time. In recent years, the digital advertising industry has experienced significant growth, with projections indicating that its market is poised to surpass an impressive $740.3 billion and it is expected to continue to grow in the future (Figure 25). PORTERS FIVE FORCES 1. Competitive Rivals (High) Although the firm is a clear leader in their business sector, it has to contend with stiff rivalry since it functions within a dynamic market. The organization competes side-by-side with other social networking sites such as Twitter, Figure 23 - Valuation ratios evolution (Source: company 2023 annual report) 10 Competitive Rivals Potential for New Entrants in the Industry Supplier Power Customer Power Threat of Substituiton Revenue in billions of dollares Ratio (x) META 134,9 1 GOOGLE 307,4 2,3 AMAZON 574,8 4,3 Table 3 - Competitor Revenue Comparation (Source: author estimates) Figure 26 - Porter's Five Forces analysis (Source: author estimates) TikTok, and Snapchat. Also, Meta competes with indirect competitors such as Google and Amazon, which are driven by advertising revenue. 2. Potential for New Entrants in the Industry (Low to Moderate) The social media and Advertising sector presents significant and challenging barriers to entry. The industry is dominated by major players. Meta. For example, it has already established a huge strong brand recognition and user loyalty, making it difficult for new entrants to attract users. Competing with such well-established companies require substantial financial resources for technology, infrastructure, and marketing. Additionally, regulatory barriers are increasing, particularly concerning data privacy and security, adding another layer of difficulty for new players in the market. 3. Supplier Power (Low) The company's key suppliers include technology providers offering cloud services, hardware, and software components, as well as content creators and advertisers. However, the effect of these suppliers on the company is offset as the company have an excellent financial capability which enable them to make considerable in-house facilities, research and development investments thus lowering reliance on outside sources. All the same, the need to reach such a vast audience also makes it easier for content creators and inventors to work with Meta. 4. Customer Power (High) We categorize the company customers into Individuals and Advertisers. While Individuals do not directly pay for the company's services, their engagement is crucial for the company's success and longevity. For Advertisers, although there is strong competition, the company's large user base and effective advertising platform provide a compelling value proposition, ensuring advertiser satisfaction and confidence of Meta Service. 5. Threat of Substitution (Moderate to High) As previously mentioned, the market is highly competitive, and there is always the possibility that trends may shift, leading users to choose alternative forms of entertainment and communication. However, we believe Meta is wellequipped to retain its current users and attract new ones. The company's extensive suite of apps (Facebook, Instagram, Messenger, WhatsApp) positions it to adapt to these potential changes effectively, ensuring continued engagement and relevance in the evolving digital landscape. COMPETITORS New companies from diverse industries, such as Uber, Netflix, and Amazon, are entering the advertising market by leveraging their platforms to offer ad services to other businesses. While Meta has a strong position on social media advertising, these emerging players are gradually capturing a share of the ad market. Although advertising is not the primary revenue stream for these companies, they pose a long-term threat to Meta. Clients may perceive these 11 Table 4 - WACC Assumptions (Source: author estimates) new opportunities as more efficient and strategically advantageous, potentially shifting their advertising spend away from traditional social media channels. GOOGLE Google LLC is a subsidiary of Alphabet Inc. and is ranked as one of the world’s leading internet search and advertisement providers. The company’s corporate structure also includes important sectors such as advertising, search functionality, specific platforms and operating systems, as well as managing enterprise and hardware related sections. The company presented $307.4 billion of revenue in 2023, which is 2.3x higher than Meta. Google stands out as Meta's primary competitor, given their shared reliance on digital advertising as a core revenue stream. In terms of company size and market capitalization, Google emerges as the most comparable counterpart to Meta in the competitive landscape. Both entities navigate on the digital market, “fighting” for market dominance in the constantly changing landscape of online advertising and technology. AMAZON Amazon.com, Inc. operates in the retail sale of consumer products, advertising, and subscription service through both online and physical stores, mainly in North America. Started from selling booking in 1994 but quickly expanded into a broad marketplace, offering a vast range of products. Even though the company had a quick success in their industry, the company has decided to diversify their business into areas such as Amazon Web Services (AWS) for cloud computing, Prime for subscriptions, and different advertising platforms. In 2023, Amazon presented $574.8 billion of revenue, which is 4.3x higher than Meta. VALUATION DCF VALUATION WACC DCF analysis employs the Weighted Average Cost of Capital [WACC] as its key input. WACC is a discount rate that helps us to estimate the present value of our future estimated cash flows. It is crucial to use an accurate WACC in DCF analysis to guarantee correct calculation of present value of the projected cash flows due to small modifications in inputs that can materially affect valuation. The following formula was applied: 𝑊𝐴𝐶𝐶 = 𝑅𝑒 ∗𝐸 𝐸+𝐷 +𝑅𝑑` ∗ 𝐷 𝐸+𝐷 ∗ (1 − 𝑡) To begin, we calculate the market value of the firm’s equity by multiplying the total number of shares by the last share price of 2023, ending up with $858,327,080,576.98. Next, we estimate the firm’s market value of Debt, which was $37,834,000,000.00. To find out the Cost of Debt, we use the US Corporate Effective Yield for the rating of the credit rating of the company (AA) – 5.05%. The credit rating from the company was retrieve from company 12 0 20000 40000 60000 80000 100000 120000 140000 160000 180000 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 -10,00% 0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% 70,00% 80,00% 0 500 1000 1500 2000 2500 3000 3500 2019 2020 2021 2022 2023 Reality Labs Revenue Growth Figure 27 - Meta MAU's over the last 5 years in billions (Source: Statista) Figure 28 - Meta forecasted MAU in the next 10 years (Source: Author) annual report and the yield per the current US corporate rating at the moment on this rating. Having the Cost of Debt calculated, we proceed for the calculation of the cost of equity by using the Capital Asset Pricing Model [CAPM]. This model required a risk-free rate (4,42%) extracted from the United States 10-year Treasury Note, a market risk premium (4,60%), sourced on the Market Risk Premium Damodaran website, and a Beta (1,11) based on a regression made between the company monthly price over the last 10 years and the CRSP index, as we did not find suitable for this analysis to use the usual bottom-up approach with the peers, due to the business differences. We got a Cost of Equity of 9,574%. By using all the inputs necessary and an effective tax rate of 25%, value driven by Damodaran website, we computed an average WACC of 9,574%. Revenues To forecast the company's revenue, we have categorized it into two primary revenue streams: Family of Apps (FoA) and Reality Labs. For FoA, we have chosen to estimate revenues based on the growth of the company’s active users. To start, we calculate the average Yearly Active Users (YAU) growth over the last five years, arriving to the value of 8.71%. However, acknowledging that there is a finite number of possible users, we decided to use a more conservative approach using 4% of growth in the first five years and 2% for the remaining ones. Despite the more conservative approach for the YAU forecast, the company’s ability to attract new users due to innovation and several emerging markets opportunities, let us be very confident that the value forecast is possible and realistic. Then, we proceed to calculate the Average Revenue User Return (ARPU). After evaluating both the last 3and 5-years averages, we chose to proceed with the higher value of $32.38 (3y Average), as we had already taken a conservative approach on the forecast of YAU. Finally, we multiplied the projected YAU by the ARPU to estimate the total revenue figures, as shown in Figure 28. We have also used a sensitive analysis to observe how the changes in YAU and the average revenue per user would influence in total revenue. Sensitive Analysis ($/Revenues in M) - MAU & Average Revenue per User Avg Rev.($) per User MAU (in billions) $ 131 948 3,31 3,51 3,71 3,91 4,11 4,31 4,51 31,77 105159 111513 117867 124221 130575 136929 143283 32,77 108469 115023 121577 128131 134685 141239 147793 33,77 111779 118533 125287 132041 138795 145549 152303 34,77 115089 122043 128997 135951 142905 149859 156813 35,77 118399 125553 132707 139861 147015 154169 161323 Table 5 - Sensitive Analysis - MAU & Average Revenue per User Regarding Reality Labs, we observed that while this segment experienced a continuous growth in the past, it has slowed significantly down in the last 2 years, with revenues stagnating at around $3 billion. From their minimal 19 Income Statement 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Revenues 12 466 17 928 27 638 40 653 55 838 70 697 85 965 117 929 116 609 134 902 134 590 139 854 145 328 151 021 156 942 160 021 163 161 166 364 169 632 172 964 Advertising 11492 17079 26885 39942 55013 69655 84169 114934 113642 131948 131590 136854 142328 148021 153942 157021 160161 163364 166632 169964 Reality Labs & Other Revenue 974 849 753 711 825 1042 1796 2995 2967 2954 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 Cost of Revenue 2153 2867 3789 5454 9355 12770 16692 22649 23754 26006 26918 27971 29066 30204 31388 32004 32632 33273 33926 34593 Gross Profit 10 313 15 061 23 849 35 199 46 483 57 927 69 273 95 280 92 855 108 896 107 672 111 883 116 262 120 817 125 553 128 016 130 529 133 091 135 705 138 371 Operating Expenses 5319 8836 11422 14996 21570 28941 36602 48527 59300 59890 60566 62934 65398 67959 70624 72009 73422 74864 76334 77834 Selling, General & Administrative Expenses 2653 4020 5503 7242 11297 15341 18155 23872 25681 22979 26918 27971 29066 30204 31388 32004 32632 33273 33926 34593 Research and Development 2666 4816 5919 7754 10273 13600 18447 24655 33619 36911 33648 34963 36332 37755 39235 40005 40790 41591 42408 43241 Operating Profit 4 994 6 225 12 427 20 203 24 913 28 986 32 671 46 753 33 555 49 006 47 107 48 949 50 865 52 857 54 930 56 007 57 106 58 227 59 371 60 537 Unusual Expenses/(Income) 0 0 0 0 0 5 000 0 0 4 611 2 255 3365 3496 3633 3776 3924 4001 4079 4159 4241 4324 Other Expense/(Income) 84 31 -91 -391 -448 -826 -509 -531 125 -677 -673 -699 -727 -755 -785 -800 -816 -832 -848 -865 Pretax Income 4 910 6 194 12 518 20 594 25 361 24 812 33 180 47 284 28 819 47 428 44 415 46 152 47 958 49 837 51 791 52 807 53 843 54 900 55 978 57 078 Income Taxes 1970 2506 2301 2387 3249 6327 4034 7914 4109 7190 7402 7692 7993 8306 8632 8801 8974 9150 9330 9513 Net Income After Taxes 2 940 3 688 10 217 18 207 22 112 18 485 29 146 39 370 24 710 40 238 37 012 38 460 39 965 41 531 43 159 44 006 44 869 45 750 46 649 47 565 Extraordinary Events 0 0 0 -2 273 0 0 0 0 -1 510 -1 140 0 0 0 0 0 0 0 0 0 0 Net Income 2 940 3 688 10 217 15 934 22 112 18 485 29 146 39 370 23 200 39 098 37 012 38 460 39 965 41 531 43 159 44 006 44 869 45 750 46 649 47 565 APPENDICES APPENDIX 1 – INCOME STATEMENT . 20 Balance Sheet 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Assets Cash and Cash Equivalents 11 199 18 434 29 449 41 711 41 114 54 855 61 954 47 998 40 738 65 403 80 509 89 823 99 501 109 557 120 006 131 320 142 856 154 619 166 612 178 840 Accound Receivable, Net 1678 2559 3993 5832 7587 9518 11335 14039 13466 16169 16824 17482 18166 18878 19618 20003 20395 20796 21204 21621 Prepaid Expenses and other current assets 513 659 959 1 020 1 779 1 852 2 381 4 629 5 345 3 793 4711 4895 5086 5286 5493 5601 5711 5823 5937 6054 Total Current Assets 13 390 21 652 34 401 48 563 50 480 66 225 75 670 66 666 59 549 85 365 102 043 112 200 122 753 133 720 145 116 156 923 168 962 181 237 193 753 206 514 Property, Plant & Equipment 5784 7819 11803 18337 31573 55446 70399 90044 117166 143015 127861 132861 138061 143470 149095 152020 155003 158046 161150 164316 Accumulated Depreciation -1817 -2132 -3212 -4616 -6890 -10663 -15418 -20080 -24975 -33134 -28264 -29369 -30519 -31714 -32958 -33604 -34264 -34936 -35623 -36322 Long Term Invesments 0 0 0 0 0 86 6 234 6 775 6 201 6 141 6730 6993 7266 7551 7847 8001 8158 8318 8482 8648 Goodwill 17 981 18 026 18 122 18 221 18 301 18 715 19 050 19 197 20 306 20 654 21534 22377 23252 24163 25111 25603 26106 26618 27141 27674 Intangibles 3929 3246 2535 1884 1294 894 623 634 897 788 1009 1049 1090 1133 1177 1200 1224 1248 1272 1297 Other Long Term Assets 699 796 1312 2135 2576 2673 2758 2751 6583 6794 5384 5594 5813 6041 6278 6401 6526 6655 6785 6919 Total non-current Assets 26576 27755 30560 35961 46854 67151 83646 99321 126178 144258 134254 139504 144965 150643 156549 159621 162753 165948 169207 172532 Total Assets 39 966 49 407 64 961 84 524 97 334 133 376 159 316 165 987 185 727 229 623 236 297 251 704 267 718 284 363 301 666 316 544 331 715 347 185 362 960 379 046 Liabilities Accounts Payable 378 413 582 770 1361 2249 2424 5135 6107 5712 5384 5594 5813 6041 6278 6401 6526 6655 6785 6919 Other Current Liabilities 446 639 1 084 1 529 2 922 3 613 5 835 7 000 7 116 9 071 8075 8391 8720 9061 9417 9601 9790 9982 10178 10378 Notes Payables/Short-term Debt 0 201 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Current Port. Of LT Debt/Capital Leases 114 7 0 0 0 55 54 75 129 90 108 112 116 121 126 128 131 133 136 138 Current Operating Lease Liabilities 0 0 0 0 0 800 1 023 1 127 1 367 1 623 1480 1538 1599 1661 1726 1760 1795 1830 1866 1903 Accrued Expenses 486 665 1 209 1 461 2 734 8 336 5 645 7 798 12 307 15 464 12786 13286 13806 14347 14909 15202 15500 15805 16115 16432 Total Current Liablilities 1424 1925 2875 3760 7017 15053 14981 21135 27026 31960 27833 28922 30054 31231 32456 33092 33742 34404 35080 35769 Total Long Term Debt 119 107 0 0 0 418 469 506 10 481 18 985 19 058 19 084 19 112 19 140 19 170 19 185 19 201 19 217 19 233 19 250 Long term Debt 0 0 0 0 0 0 0 0 9 923 18 385 18385 18385 18385 18385 18385 18385 18385 18385 18385 18385 Capital Lease Obligations 119 107 0 0 0 418 469 506 558 600 673 699 727 755 785 800 816 832 848 865 Deferred Income Tax 769 163 0 0 673 1039 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Non-Current Operating Lease Liabilities 0 0 0 0 0 9 524 9 631 12 746 15 301 17 226 16487 17132 17803 18500 19225 19603 19987 20380 20780 21188 Other Long Term Liabilities 1558 2994 2892 6417 5517 6288 5945 6721 7206 8284 8075 8391 8720 9061 9417 9601 9790 9982 10178 10378 Total Long term Liabilities 2 446 3 264 2 892 6 417 6 190 17 269 16 045 19 973 32 988 44 495 43 621 44 608 45 634 46 701 47 812 48 389 48 978 49 578 50 191 50 816 Total Liabilities 3 870 5 189 5 767 10 177 13 207 32 322 31 026 41 108 60 014 76 455 71 454 73 529 75 688 77 933 80 267 81 481 82 719 83 982 85 271 86 585 Equity Additional Paid-In Capital 30 225 34 886 38 227 40 584 42 906 45 851 50 018 55 811 64 444 73 253 74025 76920 79930 83062 86318 88011 89739 91500 93297 95130 Retained Earnings (Accumulated Deficit) 6099 9787 21670 33990 41981 55692 77345 69761 64799 82070 92164 102653 113553 124879 136650 148652 160889 173366 186088 199061 Other Equity -228 -455 -703 -227 -760 -489 927 -693 -3530 -2155 -1346 -1399 -1453 -1510 -1569 -1600 -1632 -1664 -1696 -1730 Total Equity 36 096 44 218 59 194 74 347 84 127 101 054 128 290 124 879 125 713 153 168 164 843 178 174 192 030 206 431 221 399 235 063 248 996 263 203 277 689 292 461 Total Liabilities + Equity 39 966 49 407 64 961 84 524 97 334 133 376 159 316 165 987 185 727 229 623 236 297 251 704 267 718 284 363 301 666 316 544 331 715 347 185 362 960 379 046 APPENDIX 2 – BALANCE SHEET 21 APPENDIX 3 – REVENUE FORECAST Ads Revenue Forecast 2018 2019 2020 2021 2022 2023 Avg 5y Avg 3y Average Yearly Active Users (in billions) 2,58 2,79 3,16 3,53 3,69 3,91 3,416 3,71 Growth - 8,14% 13,26% 11,71% 4,53% 5,96% 8,72% 7,40% Revenue (in millions) 55013 69655 84169 114934 113642 131948 102870 120175 Average Revenue per user ($) 21,32 24,97 26,64 32,56 30,80 33,75 28,34 32,38 FoA Revenue Assumptions Average revenue per user ($) $ 32,38 Average YAU growth over the 5 first years 4% Average YAU growth over the 5 last years 2% FoA Revenue Forecast 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Average Yearly Active Users Forecast (in billions) 4,06 4,23 4,40 4,57 4,75 4,85 4,95 5,05 5,15 5,25 Ads Revenue Forecast 131590 136854 142328 148021 153942 157021 160161 163364 166632 169964 Reality Labs Revenue 2019 2020 2021 2022 2023 Reality Labs Revenue 1042 1796 2995 2967 2954 Growth 26,30% 72,36% 66,76% -0,93% -0,44% Reality Labs Revenue Assumptions Value used in perpetuity (in millions) $3000 22 APPENDIX 4 – BETA CALCULATION APPENDIX 5 – WACC (1) Retrieved from Refinitiv (2) Retrieved from Refinitiv (3) US Corporate AA Effective Yield (4) US 10 Treasury Note (5) Retrieved from Damodaran Website SUMMARY OUTPUT Regression Statistics Multiple R 0,514324439 R Square 0,264529628 Adjusted R Square 0,258296828 Standard Error 0,083792572 Observations 120 ANOVA df SS MS F Significance F Regression 1 0,297990344 0,297990344 42,44154126 1,86914E-09 Residual 118 0,82850103 0,007021195 Total 119 1,126491374 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95,0% Upper 95,0% Intercept 0,010111888 0,007867689 1,285242566 0,201224407 -0,005468277 0,025692054 -0,005468277 0,025692054 X Variable 1 1,106268665 0,169810694 6,514717281 1,86914E-09 0,769997259 1,442540071 0,769997259 1,442540071 Capital Structure Number of Shares Outstanding (1) 2200048907 Current Market Price per share (2) 390,14$ Market Value of the firm Equity 858 327 080 576,98$ Current Lease Obligation 1 623 000 000 Non-Current Lease Obligation 17 226 000 000 Long-term Debt 18 985 000 000 Value of Debt 37 834 000 000,00$ Firm Value 896 161 080 576,98$ Weight of Equity 95,78% Weight of Debt 4,41% Cost of Debt Cost Of Debt (3) 5,05% Tax Rate 25,00% Cost of Equity Risk-free Rate (4) 4,42% Market Risk Premium (5) 4,60% Beta 1,11 CAPM 9,51% WACC 9,274% WACC 23 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Net Income 18 485 29 146 39 370 23 200 39 098 37 012 38 460 39 965 41 531 43 159 44 006 44 869 45 750 46 649 47 565 Plus: D&A 4315 5741 6862 7967 10904 13610 12786 13286 13806 14347 14909 15202 15500 15805 16115 Less: CaPex -15102 -15115 -18567 -31186 -27045 -27590,97 -28670 -29792 -30959 -32173 -32804 -33448 -34105 -34774 -35458 Less: Change in WC 7250 -2723 700 5683 3836 4038 4196 4360 4531 4708 4801 4895 4991 5089 5189 Unlevered FCF 74176 75720 78684 81766 84971 86919 88624 90364 92139 93949 WACC 9,27% 9,27% 9,27% 9,27% 9,27% 9,27% 9,27% 9,27% 9,27% Cumulated Discount Period 1 0,92 0,84 0,77 0,70 0,64 0,59 0,54 0,49 0,45 Present Value of FCF 74176 69294 65894 62664 59593 55786 52053 48570 45321 42289 Enterprise Value Cumulative Present Value of FCF 575639 Terminal Value g 2% WACC 9,27% Terminal Value 1317340 Discount Factor 0,450128 PV of Terminal Value 592972 % of EV 0,507416 Enterprise Value 1168611 Implied Equity Value & Share Price Enterprise Value 1168611 (Less) Net Debt 37834 (Plus) Cash and Cash Equivalents 65 403 Implied Equity Value 1196180 Share Outstanding 2200,049 Implied Share Price $ 543,71 APPENDIX 6 – DCF 24 APPENDIX 7 – RELATIVE VALUATION Identifier (RIC) Company Name EV / Revenues EV / EBITDA EV / EBIT META.O Meta Platforms Inc 6,92 11,89 17,62 Peers GOOGL.OQ Alphabet Inc 5,77 13,57 18,81 AMZN.OQ Amazon.com Inc 2,87 12,92 42,51 Average Multiple 4,32 13,24 30,66 Meta Platforms Inc 134,90 60,19 49,01 Meta Platforms Inc EV 582,93 797,13 1502,41 25 APPENDIX 8 – SWOT ANALYSIS APPENDIX 9 – COMMITTEE COMPOSITION Strenghts Weakness Brand Recognition and Market Dominance: The company is one of the most recognized brands globally and the leader in their industry. Strong Financial Performance: Consisted revenue growth and profitability, supported by a robust advertising business. Large User Base: Across all of its platforms, billions of active users generate a vast amount of data and advertising opportunities. Financials: The company is very healthy financially, which can help in future opportunities and challenges. Privacy Concerns and Regulatory Issues: Growing regulatory constraints and constant examination of data privacy policies may result in penalties. These limitations can have an effect on company operations. Reliance on Advertising Income: Since advertising accounts for a sizable amount of Meta's revenue, changes in the market and shifts in the amounts spent on advertising can impact the company's financial wealth. Problems with trust and public image: Meta's reputation has been damaged. Ongoing issues with data misuse and disinformation persist. Difficulties with content moderation further harm their image. Opportunitties Threats Growing Digital Advertising Market: The continuous growth of digital advertising, particularly mobile advertising, offers ongoing revenue opportunities. Monetization of WhatsApp and Messenger: Further monetizing messaging services through new features and business tools can enhance revenue. International Market Expansion: Expanding presence in emerging markets with growing internet penetration. Increasing digital adoption. Innovation in AI and Machine Learning: Leveraging AI for better ad targeting user engagement and platform security. Competition: Strong competition from other tech giants like Google and Apple, as well as the emergence of large companies entering the advertising sector, such as Uber and Amazon Regulatory Changes: Future new restrictions can difficult the company’s ability to operate efficiently or the possibility to reach new markets. 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