Meta (FB) reported a mixed 4Q21 but the big news was materially lower 2022 guidance accompanied by very cautious commentary about the company’s competitive position and challenges.  In our 3Q21 update we discussed the company resetting its outlook.  It turns out that was just a small first step as the new 2022 guidance and overall management commentary led to a much, much larger full reset of expectations leaving investors uncertain about the company’s future growth rate.

FB endured a similar period in the second half of 2018 and emerged vibrantly.  The question now is whether the company is facing maturity to a slower but still healthy growth rate or is entering the early stages of secular decline.  We strongly suspect it’s the former but investors are likely to take a wait and see attitude. News out of the company is unlikely to provide more clues until the next earnings report in three months and even that may be too soon for clear answer.

Stock Reaction:  FB shares are plunging 25% the day after the earnings report.  The stock is trading at levels last seen in early summer 2020 and now sits less than 10% above pre-pandemic levels.  In 2019, FB had revenues, EBITDA, and EPS of $71 billion, $35 billion, and $8.56, respectively.  After analysts have slashed 2022 estimates these same figures are $128 billion $62 billion, and $12.00.  The stock’s market cap was $584 billion at the end of 2019 and is $662b billion today.

Earnings Analysis:  Management pointed to several items causing the dramatically lower and unexpected 2022 financial performance including a transition to short-form video driving engagement, related competition and advertising share loss from TikTok, ongoing impacts of Apple’s privacy initiatives, increased investment to counteract these issues, and new and growing spending on the metaverse.  These factors are projected to slow revenue growth to between 5% and 10% in 2022 with profit margins contracting.  Investors were well prepared for a slower growth rate as the pandemic-fueled growth of 30-40% was clearly going to cool.  A reset to 15-20% growth appeared to be expected with stable margins excluding spending on the metaverse.

Management’s tone on the conference call, the new guidance, and the first ever decline in daily active users for the core Facebook Blue has investors questioning whether the 2022 slowdown is a sign that the company has reached maturity.  Will the company work through its current issues and see growth pick up to prior expected levels beginning in 2023?  Could growth stay in the upper single digits or even decelerate further toward the low single-digit growth in traditional TV advertising?  Is FB making the correct current investments to accelerate growth from 2022 levels?

Northlake is unsure of the answers to these questions and we are unlikely to make a sound argument for renewed growth for a couple of quarters.  However, there are reasons to be optimistic.  First, the company has faced these types of transitions before.  There was desktop to mobile.  Then mobile went from text to stories (this was the 2018 issue referenced above).  Now, there is stories to short-form video while a platform transition to the metaverse could be several years away. 

Management has been successful in each major transition so far.  The company has always faced competition but a big difference now is the law of large numbers.  However, digital advertising is still growing rapidly and has barely tapped the massive bucket of traditional TV advertising.  Even if FB faces new challenges, the company’s platforms still offer one of the very best ways to effectively reach consumers. 

Target Price:  We do not minimize the new challenges the company faces.  It is just too soon to give up especially given the massive valuation compression the shares have undergone.  Since 2019, revenue and EBITDA are up 80%, EPS are up 40%, but the stock is up 9%.  The shares now trade at just 10X EBITDA and a P-E of 20X on the reset expectations that likely have material one-time cost impacts to the Apple privacy response.  These multiples are in line or a discount to the average stock.  Using an 11X multiple on hopefully trough 2022 estimates, we see the ability for FB shares to rebound to $285 later this year.  That is nearly 20% upside.  If growth picks up in 2023, we can see the shares well north of $300 without stretching our assumptions.  Current 2022 valuation is only a little above where the stock traded in prior challenging periods suggesting downside is limited to the $200 area.  We think it is too soon to know if FB can return to glory but the backdrop of digital advertising growth, prior management success facing challenges, and reasonable assumptions showing a pickup in growth beginning late in 2022 and accelerating in 2023 suggest to us the best strategy is to sit tight and hold FB shares.

Later this quarter, FB shares will start using the new ticker symbol, MVRS, reflecting the company’s new name of Meta Platforms Inc.

FB is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.