VALUATION HIGHLIGHTS

1. Advertising constitutes 94% of the Trefis price estimate for Meta Platforms's stock.

WHAT HAS CHANGED?

Latest Earnings

For Q2 FY 2023, Meta Platforms (Facebook) reported revenue of $31.99 billion, up 11% y-o-y. It was driven by improvement in revenues from advertising segment. Notably, DAUs were 2.06 billion on average for June 2023, an increase of 5% y-o-y.

Name Change

At Connect 2021, CEO Mark Zuckerberg announced that the company will now change to Meta Platforms Inc as they shift to metaverse-first, not Facebook-first. That means one won’t need a Facebook account to use the other services over time. They want to create an immersive platform and "an embodied internet where you’re in the experience, not just looking at it. We call this the metaverse, and it will touch every product we build".

Impact of Coronavirus

IT software and Services industries fell in demand for software and web services in 2020 as consumers focus solely on essentials, not discretionary products. That said, the companies with a portfolio of software and services aimed at remote collaboration benefited due to work from home (WFH) trend.

META posted strong growth in 2020 and 2021. However, the trend slowed down in 2022 due to the tough macroeconomic scenario. It reported total revenues of $116.61 billion in FY2022 - down 1% y-o-y.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below we highlight key drivers of Meta Platforms’ value that present opportunities for upside or downside to the current Trefis price estimate for Meta Platforms.

Advertising

• Meta Platforms’ advertising revenue has increased from $40 billion in 2017 to $113.64 billion in 2022. Internet users are continuously increasing worldwide, and more corporations are opting for online advertisement; thus, by the end of our forecast period, revenue is expected to cross $164 billion.

BUSINESS SUMMARY

Meta Platforms is the world’s most popular social network that helps people connect with family and friends. The company makes money primarily through advertising, which it provides advertisers by targeting specific demographics based on the information posted on Facebook. Also, Meta Platforms facilitates the purchase of virtual goods in games and applications on Facebook’s platform, charging a transaction fee for each virtual good.

SOURCES OF VALUE

Advertising

This remains the most significant division for Meta Platforms, contributing about 97% of its overall value. This high-value contribution can be attributed to two main factors: scale and user engagement. Facebook has over 2.96 billion monthly active users, and user engagement within this base is also high. These stellar metrics result from innovative product development at Meta Platforms, which includes Timeline, News-Feed, Messenger, Search, and several other features designed with the long-term vision of ensuring that user stickiness to Facebook remains high. In future years, scale and user engagement are expected to be strongly driven by growth in the mobile space.

With a highly active user base, Facebook has succeeded with its monetization strategy. Its move to raise the proportion of feed-based ads and make the platform less cluttered has garnered success among marketers. Ad product improvements and targeting capabilities have driven enhanced ROI and value for advertisers.

Payments And Other Fees

Meta Platforms also makes money by acting as a platform for purchasing virtual goods on social gaming applications on Facebook by partnering with gaming companies such as Zynga. Zynga’s games like Farmville and Poker have been wildly popular, enabling the platform to extract substantial revenues from selling virtual goods like Poker chips. Recently, it has introduced a paywall for content providers. However, the ongoing shift towards higher mobile usage from desktop usage has caused pressure on this revenue stream. Payments from the gaming business on Facebook could decline in the near term.

KEY TRENDS

Other Platforms - WhatsApp, Instagram, Messenger - Have Huge Growth Potential

We think investments in diverse platforms (such as Messenger, Instagram, WhatsApp, Search, and Oculus) could reap multi-billion dollar businesses for the company in the long run, and management hasn’t even begun scratching the surface of this potential. We think META could start unlocking value in other businesses such as WhatsApp, Search, and Messenger over the coming years. Overall, we believe all these moving parts will continue to fuel the company’s top-line growth for years.