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Fundamental View
AS OF 13 Aug 2024Meta has Aa3/AA-/NR ratings which reflects extremely strong credit metrics of 0.3x gross leverage (pro forma for $10.5 bn bond deal) and $40 bn net cash. We are encouraged by Meta’s strong advertising growth relative to peers. However, Meta is going through a heavy investment cycle for both AI and the metaverse.
We continue to expect Meta to be a regular/annual issuer to fund its shareholder returns and massive investments. Longer term, we expect Meta to adhere to its previously communicated financial policy of maintaining a positive or neutral cash balance. Meta has legal and regulatory risks notably an FTC suit that seeks to unwind its prior acquisitions of Instagram and WhatsApp.
Business Description
AS OF 13 Aug 2024- Meta Platforms is the largest social networking company in the world. Meta generates substantially all of its revenue from advertising which includes Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications.
- In 2Q24, Family of Apps was 99% of revenue (98.1% from advertising and 0.9% from other) and Reality Labs was 1% of revenue. Reality Labs generated $16.7 bn in operating losses during LTM 2Q24 as the company is investing heavily in the metaverse.
- There are 3.27 bn Family Daily Active People (DAP) as of 2Q24, and the Family Average Revenue per Person (ARPP) was $11.89 quarterly in 2Q24. While US & Canada have the lowest number of users, they generate higher revenue than other regions given significantly higher ARPU. Revenue was 43% from US & Canada, 24% from Europe, 20% from Asia Pacific, and 13% from Rest of World in 2Q24.
- Meta is headquartered in Menlo Park, California. Employee headcount was 70.8k at 2Q24.
Risk & Catalysts
AS OF 13 Aug 2024In 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 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 changes (e.g., Section 230 protections).
In April 2024, the US signed into law a bill requiring a sale or ban of TikTok, although we expect legal challenges. If a ban is implemented, this would positively impact Meta and others with competing short-form video products.
In October 2022, activist Altimeter Capital wrote a letter to Zuck and Board although it was on the friendly-side of activism and some suggestions have already been implemented.
Key Metric
AS OF 07 Feb 2024| $ mn | 2019 | 2020 | 2021 | 2022 | LTM 4Q23 |
|---|---|---|---|---|---|
| Revenue YoY % | 26.6% | 21.6% | 37.2% | (1.1%) | 15.7% |
| EBITDA | 34,562 | 46,069 | 63,882 | 49,622 | 71,955 |
| EBITDA Margin | 48.9% | 53.6% | 54.2% | 42.6% | 53.3% |
| CapEx % of Sales | 22.1% | 18.3% | 16.3% | 27.5% | 20.8% |
| Sh. Ret. % of CFO-CapEx | 20% | 27% | 116% | 152% | 46% |
| Net Debt | (54,855) | (61,954) | (47,998) | (30,815) | (47,018) |
| Gross Leverage | 0.0x | 0.0x | 0.0x | 0.2x | 0.3x |
| EV / EBITDA | 15.5x | 15.8x | 14.0x | 5.8x | 12.3x |
CreditSight View Comment
AS OF 07 Aug 2024Meta has Aa3/AA-/NR ratings which reflects extremely strong credit metrics of 0.3x gross leverage (pro forma for $10.5 bn bond deal) and $40 bn net cash. We are encouraged by Meta’s strong advertising growth relative to peers. However, Meta is going through a heavy investment cycle for both AI and the metaverse. We continue to expect Meta to be a regular/annual issuer to fund its shareholder returns and massive investments. Longer term, we expect Meta to adhere to its previously communicated financial policy of maintaining a positive or neutral cash balance. Meta does have legal and regulatory risks notably an FTC suit that seeks to unwind its prior acquisitions of Instagram and WhatsApp.
Recommendation Reviewed: August 07, 2024
Recommendation Changed: April 18, 2024
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