Fundamental ViewAS OF 16 Mar 2023
- Meta’s further reduction in total expenses for 2023 is a favorable development for creditors, and we expect operating leverage to drive meaningful EBITDA growth in 2024. Gross leverage is just 0.2x and the company has $31 bn net cash, although we do expect a significant decline in net cash as shareholder returns exceed FCF through year-end 2023.
- Meta previously boosted its share buyback authorization by $40 bn which indicates that the company will remain aggressive with repurchases and increases the odds it will come to market this year. The strong balance sheet and durability of its highly cash generative Family of Apps business are supportive in the medium-term although competition and regulation remain long-term concerns.
Business DescriptionAS OF 16 Mar 2023
- Meta Platforms is the largest social networking company in the world. Meta generates substantially all of its revenue from advertising on Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications.
- In 4Q22, Family of Apps was 98% of revenue (97.2% from advertising and 0.6% from other) and Reality Labs was 2% of revenue. Reality Labs generated $13.7 bn in operating losses during LTM 4Q22 as the company is investing heavily in the metaverse.
- Total MAUs and DAUs are 2,963 mn and 2,000 mn respectively at 4Q22. While US & Canada have the lowest number of users, they generate higher revenue than other regions given significantly higher ARPU. Revenue is 49% from US & Canada, 22% from Europe, 19% from Asia Pacific, and 11% from Rest of World.
- Meta is headquartered in Menlo Park, California. Employee headcount was 86.5k at 4Q22.
Risk & CatalystsAS OF 16 Mar 2023
- In December 2020, the FTC filed a lawsuit against Meta targeting its acquisitions of Instagram and Whatsapp. If Meta is forced to unwind prior acquisitions, this would be a credit negative given reduced scale and diversification.
- Meta’s Facebook and Instagram are uniquely exposed to rising competition from TikTok and other social media platforms. Meta is seeking to emulate TikTok’s success with its own short-from video product Reels. The US has again threatened to ban TikTok unless its Chinese owners divest its stake.
- Meta’s business model relies almost entirely on user-generated content. As such, there are risks related to customer privacy (e.g., Cambridge Analytica data scandal in 2018) and regulatory scrutiny.
- In October 2022, activist Altimeter Capital wrote a letter to Zuck and Board although we think it was on the friendly-side of activism and some suggestions have already been implemented.
Key MetricsAS OF 16 Mar 2023
|$ mn||2018||2019||2020||2021||LTM 4Q22|
|Revenue YoY %||37.4%||26.6%||21.6%||37.2%||(1.1%)|
|CapEx % of Sales||25.0%||22.1%||18.3%||16.3%||27.5%|
|Sh. Ret. % of CFO-CapEx||84%||20%||27%||116%||152%|
|EV / EBITDA||10.1x||15.5x||15.8x||14.0x||5.8x|
CreditSights ViewAS OF 22 May 2023
We came away from Meta’s 1Q23 results with increased confidence since advertising revenue is seeing a much sharper acceleration in growth than expected. We expect meaningful EBITDA growth in 2024 given improving revenue, tightly managed expenses given the layoffs and facilities consolidation, and lapping of $3-5 bn restructuring costs. Meta has $28 bn net cash at 1Q23, although we expect a significant decline in net cash as shareholder returns exceed FCF through year-end 2023. We estimate gross leverage of 0.4x pro forma for the recent $8.5 bn bond deal. Meta previously commented it will periodically access the debt markets although maintain positive or neutral net cash over time.
Recommendation Reviewed: May 22, 2023
Recommendation Changed: August 04, 2022