Growth Stocks: Meta (FB)

Meta: Is it the only stock of Metaverse?

Meta aims to build the next generation computing platform to replace "the Internet" as we know it today. Mark Zuckerberg has developed an ambitious capital investment plan to further his metaverse goals. But there are more companies that currently carry out their activity in this environment:

Roblox is the "metaverse of video games" and is very popular with younger gamers. Offering immersive metaverse experiences for its users.

For one thing, Facebook (FB.US) was renamed Meta Platforms, Inc. (MVRS.US) on October 28. Mark Zuckerberg sees the metaverse as the next transformative phase of the company's growth. Additionally, the company also posted strong results in Q3 despite the continued impact of changes to Apple's IDFA (Identifier for Advertisers) (AAPL.US), which, however, will have a limited and transitory negative impact. The metaverse is the company's long-term solution to design its operating system to replace the mobile internet. It's Meta's answer to the dominance of iOS and Android (GOOGL.US) as the company charts its path to an exciting future to say the least.

On the other, Roblox (RBLX.US) aims to create its metaverse for "human co-experience", powered by user-generated content (UGC). Now, it would not be correct to identify the metaverse as a genre, but rather a global opportunity in which different types of video games can be played within a single virtual and social environment. So Roblox could be identified as the metaverse of the youngest.

FB vs. RBLX to date

FB vs. RBLX share performance to date (October 29, 2021). source: Koyfin

Roblox shares got off to a spectacular start from their March IPO, reaching a cumulative return of nearly 45% in June. However, his momentum quickly faded. The rises almost completely disappeared in the last September-October retracement. However, it has recovered notably with a profitability to date of 20.6%.

The rise in the Meta shares for the year (since March 10) was also 20.6% as of October 29. In particular, its stocks had maintained an excellent start to 2021, which strengthened as the year progressed. It made more than a 40% gain on the year before losing its momentum in the recent pullback. The weakness that affected social media shares also affected their share price. As a result, FB stock's cumulative profit to date plummeted from its peak for the year. At the moment, both stocks continue to lead the SPDR S&P 500 ETF (SPY.US) and are also slightly behind the 22.4% performance to date of Invesco QQQ ETF (EQQQ.UK).

Meta is transforming itself by building his future in the metaverse

Meta recognizes the immense market opportunity in the metaverse. Zuckerberg emphasized that Meta's goal is "to help the metaverse reach one billion people and generate hundreds of billions of dollars from digital commerce per day." While it's hard to put a number on the opportunity right now, “The Information” predicts that the metaverse would be worth $ 82 billion by 2025. That would be just slightly less than the $ 86 billion in Facebook revenue made in fiscal 2020.

The Information believes that the current metaverse opportunity is still in its earliest stage. While video game platforms such as Roblox or Epic Games are the pioneers in offering "metaverse" experiences through games, Meta believes that it will expand those applications beyond the "metaverse of video games" to a large number of consumers and applications. corporations in the physical and virtual world.

However, video games are the fundamental starting point for the metaverse story to unfold over time. Even Facebook also accepts it through Oculus (its video game platform), and now it is spread through Project Cambria. Meta recognizes that it needs to build the next computing platform to effectively compete with iOS and Android. These platforms will become more entrenched with the proliferation of the mobile Internet. However, Meta believes that its metaverse project will help jumpstart the limitations these platforms currently have.

Interoperability will be essential. It remains to be seen how Meta will be able to do that. However, the company also recognizes that it will be critical to the success of its transformative project. Mark Zuckerberg stated that the metaverse had been on his mind even before he started Meta. The Company has also been investing in this project since 2014 with the acquisition of Oculus.

Between Roblox and Meta, who will build the next digital platform?

The project will be expensive and extremely difficult to execute. Meta acknowledges it, but at least he has a highly profitable business to financially support his ambitious foray into the metaverse.

Meta Fundamentals

The company has highlighted that it would invest substantially to build its metaverse infrastructure in the future. As a result, the company expects a reduction of $ 10 billion in operating profit by the end of 2021. Additionally, Meta indicated CapEx for 2022 will be in the range of $ 29 billion to $ 34 billion. This is a significant increase from the estimate for the end of 2021 of $ 19 billion.

Estimated Target Income and Average CapEx Investment. Data source: S&P Capital IQ

Despite the large investments required, Meta is exceptionally well positioned to meet these challenges. Whether they can be successful is another matter, but only time will tell. However, the company has a very healthy profitability profile to carry out its ambitious metaverse project. The company's core advertising platforms are still expected to maintain revenue growth and be highly profitable profit makers. These estimates have not included the potential revenue that is attributed to the metaverse opportunity. At the moment, its revenue is estimated to grow at a compound annual rate (CAGR) of 18.5% by 2026.

In a recent Trade Desk (TTD.US) article, significant growth in advertising is still indicated. Global spending is expected to reach $ 645.8 billion by 2024, representing a CAGR of 14%. Furthermore, Meta's global share is also expected to increase from 22.3% in 2020 to 25.2% in 2023.

Today, Meta's business generated so much free cash flow (FCF) that it even committed to a new $ 50 billion share buyback program. Despite the transient headwinds Meta faces due to Apple's IDFA changes, it generated a long-term FCF of $ 35.810 million. His share buyback also reached $ 31.5 billion. So these numbers are testament to Meta's credible ambitions to create the next virtual platform. They have also communicated their intention to hire more than 10,000 engineers in Europe to develop the project.

Continuing with Roblox, its popularity as a video game metaverse has been well recognized. That's why stocks trade at a much higher premium than the rest of their industry peers, such as ElectronicArts (EA.US) or Activision Blizzard (ATVI.US). It has also rapidly increased its user base. Daily Active Users (DAU) increased from only 17.1 million in Q2'19 to 43.2 million in Q2'21, representing a spectacular CAGR of 58.9%. However, there are concerns about the slowdown in user growth, as DAU increased only 2.6% quarter-on-quarter.

His adaptation of the hit South Korean Netflix series (NFLX.US), “The Squid Game,” has also been well received. Although its gameplay seems simple, it is being a great success.

We believe that Roblox has a consistent creator universe. It is one of the critical competencies of the Roblox platform. So it bodes well for the Company's video game metaverse mission. However, we are not sure if Roblox has the capacity and resources to create the true metaverse, as defined by Mark Zuckerberg last October. Unity (digital development platform) even called the metaverse a "revolution". it emphasized: "The metaverse is going to be the greatest revolution in computing platforms the world has seen, bigger than the mobile revolution, bigger than the web revolution."

Roblox fundamentals

Roblox has been increasing its income rapidly. Its revenues grew 116% year-on-year in Q2'21, however, its operating margin remained stagnant in the red. Operating leverage has been elusive for the company despite strong revenue growth. As of FQ2'21, Roblox reported a long-term operating margin of -24.8%.

Roblox pays a substantial portion of its revenue to its developers. It makes sense since Roblox is a UGC (user-generated content) platform. However, it has also hampered the company's ability to make operating profit. Furthermore, their share of total revenue remains high. In FQ2'21, their share of total revenue was 29%.

Although Roblox is profitable at FCF, it is primarily dependent on its growth in deferred revenue. Despite posting operating losses, its strong deferred revenue growth has kept cash flow profitable. However, it is also noteworthy that it requires the company to keep increasing its reserves rapidly to offset the huge operating expenses in order to maintain a positive FCF.

On the other hand, Roblox cannot take on the scale and size of Meta to build the next digital platform. Despite a strong net cash balance, it is still not profitable in terms of EBIT. In addition, the good health of its FCF is supported by the assumption of strong and continued growth in reserves. On the contrary, Meta already boasts of a highly profitable business model and is also generating a considerable amount of FCF. Furthermore, it operates a broad spectrum business model with many more users and is expected to further strengthen its influence in the digital advertising market.

Therefore, there is little doubt that Meta is far better equipped to take on the challenge of building the true metaverse. It would be interesting to see how Meta's metaverse will differ from Roblox's. Perhaps both platforms could be complementary in the future, as Meta cannot do this alone. If they want to reverse the dominance of Apple and Alphabet in the mobile Internet, they will need the participation of other companies and developers.

Key Ratios and Technical Analysis

Meta's shares currently trade at an EV / EBITDA ratio for the next 12 months (NTM) of 6.5x, while its 3-year average earnings multiples are 6.9x. In addition, it is trading at an EV / EBIT (NTM) of 18.6x, while its average 3-year EBIT multiples is 18.9x. Therefore, it can be argued that Meta's shares appear to be reasonably valued at the moment.

In contrast, Roblox is trading at a much higher EV / EBITDA (NTM) (16.1x). Therefore, there is a considerable amount of growth premium discounted in the Roblox share price.

source: xStation

As such, Meta's shares represent a better opportunity in the metaverse sector for now.

Darío García, EFA
XTB Spain