Welcome back everyone. In this video, we're going to be
talking about meta. I know there's so many opinions
about this company, so many thoughts and Analysis already on
it. So I'm hoping to share something
unique in this video. I'm hoping that you walk away
from it. Having a different perspective
on meta. Now, even though there's lots of
different opinions on this company, the stock has been
devastated this year, it's down, 74 percent year-to-date and it
still has downward momentum. It's still going down day after
day today, it's down half percent last.
Five days is down, 10%. Past months, down 34%, past six
months is down 57%, past year, it's down 72%.
The stock doesn't seem to have a bottom.
Meanwhile, this company has seemingly fooled.
Even the brightest investors of the bunch, the so-called super
investors, the ones managing hundreds of millions of dollars
in excess to billions of dollars, had their top holding,
the very top holding amongst, all of them was meta it showed
up in more portfolios of super investors earlier this year than
any other company. But for the super As well as
many other investors like you and me Mehta has been more of a
value trap than a value play. The company has been disastrous
and it's left investors thinking what do we do now?
Now, I think before we jump into today's situation with meta, I
think it would be good to take a step back and realize what this
company has gone through meta IP owed back in 2012 as Facebook,
it was just Facebook The Social Network and it was ran by
Zuckerberg, who had his goofy haircut at the time.
He was this young kid a child genius type of Kid and he owned
the majority of the company. He owned all of it.
This made investors a little bit nervous.
A young kid owning the majority of this big company.
This IP owing and it's a social media Network which weren't
really popular at the time. There was my space is the most
recent memory. So investors were reasonably
concerned after the meta IPO and the stock showed that for the
first year, the stock basically traded flat, it was around
twenty dollars per share at that period in time then Mark
Zuckerberg did something. Special.
He did something unexpected. He took Facebook his company and
made boatloads of money. We're talking about some money
that investors couldn't even conceive of Facebook turned into
a cash generating machine. And then on top of that he made
these Acquisitions 2012 he bought Instagram for a billion
dollars and turned it into another explosive.
High-growth billion-plus user cash, generating machine.
He bought WhatsApp and grew that one to have billions of users as
well. Mark Zuckerberg was firing on
all cylinders doing acquisition, after acquisition growing,
massive company after massive company.
The quarterly growth was like clockwork more user growth,
every single quarter more profits for shareholders.
And throughout this time period, the stock price reflected it
investors trusted in Mark. He was the one that they could
go to to make them boatloads of money.
And you can look at the stock returns over this time period
from 2012 to 2017. It's basically a straight line
up and to the right, you could Release money on Facebook.
It was a sure thing and the cash flows, resembled the same Trend,
going up incrementally quarter after quarter, Facebook was a
cash generative machine. Now, keep in mind during this
time period, Mark Zuckerberg owned the majority of Facebook,
not in total share count. So he didn't have the majority
of equity, but in voting rights. See, he was smart.
He wanted to have complete control over the company.
So even though he sold off the majority of it, he kept these
shares at have much more voting rights than a Normal.
Share, that gave him total control of the company.
He runs it with complete autonomy.
He's beholden to nobody else. All the directors and other
shareholders that are supposed to keep the executive in check.
Well, they're basically novelty pieces.
They're just there for show. They can't do anything.
Even if they tried zakhar Berg runs the show.
And so far, the show was phenomenal, investors couldn't
complain Mark. Zuckerberg had led this in such
a good direction. For such a long time period,
he's exceeded their expectations.
Patience to such an extent that investors push that entire
concern of ownership of the company of voting rights to the
sidelines. They forgot about it completely
at this point. Now, of course, during this
period of time, he didn't only make other shareholders wealthy,
he made himself wealthy. He was a biggest shareholder of
the company. His wealth reached a point of
being above, 50 billion dollars. Zuckerberg was one of the
wealthiest people in the world. And at that point, he basically
has accomplished the wealth came.
He doesn't care about it anymore.
He has enough money to last him. A Under lifetimes and
Zuckerberg, 's Ambitions change. We see something happen over
this time period. It becomes clearer and clearer.
That Zuckerberg is no friend with apple.
In fact, they're basically enemies.
They hate each other. They hate each other's guts, Tim
Cook and Mark Zuckerberg, do not like each other one bit.
This is obviously clear, because Mark Zuckerberg has created this
amazing platform where he has complete control.
He has massive amounts of wealth.
He's been buying different companies, he's not beholden to
anyone else. No director.
No other shareholder, but is beholden to one company.
One guy, Tim Cook. Tim Cook can exercise control
over Zuckerberg because Tim Cook controls the iPhone the platform
of distribution to billions of people that Zuckerberg has to
work through and this leads to some challenges.
It's not only clear that Zuckerberg doesn't like Tim
Cook. It's clear that Tim Cook does
not like Zuckerberg and he doesn't like Facebook.
He's mentioned many times that he thinks it's not healthy.
It's not good for users. It's not good to have.
Endless scrolling now Tim Cook being no friend of Mark
Zuckerberg and no friend of Facebook devised a way to harm
Facebook to hurt them. A lot to hurt their entire
business model and everything they've built.
It's called a TT app, tracking transparency and the best part
is Tim Cook. Did this under the guise and
under the premise of privacy, they're allowing users more
privacy. While simultaneously hurting
Facebook's business model, they're basically hitting two
birds with one stone. So to speak the APT Can
transparency has caused tens of billions of dollars to
Facebook's bottom line, it's hurt the ability for advertisers
to track what's going on and how effective their ads are the
entire premise of Facebook's business and they're currently
trying to recover from this hit and Mark Zuckerberg.
Right there. Saw that with this one little
change app, tracking transparency, Apple exercise
control over him and his company heard his bottom line heard as
market cap of his company damage, their ability to run
their business, how they see fit.
And Zuckerberg doesn't like that.
Remember he likes having control over everything that's why he
owns majority of voting shares in his company.
So what does Zuckerberg do, does he just submit to Apple?
Does he give up no Zuckerberg doesn't?
Because remember this guy's a fighter.
He literally fights in his free time.
He's training to do that right now.
He's not going to give up and let Apple take advantage of meta
forever. That's not something he wants to
do. He's trying to come up with a
way to get around Apple to circumvent them, to become the
Platform see, Mark Zuckerberg has realized how important it is
to control the hardware if he could control the hardware and
the platform that people operate on top of the software, then he
won't have to be beholden to anyone.
No apple, no Android. He's the one in total control
and that's where the meta verse comes into play.
Now, there's a lot of hints about the metaverse.
It started off with 2019 with Facebook.
Making Road plans about virtual reality, that's what it was
before the Maneuvers and then over time, virtual reality
evolved into something bigger. Or the entire VR ecosystem,
which is now called the metaverse.
A lot of people assumed that when Facebook announced they're
changing their name to Metta that it was because of the brand
tax that Facebook was just a tarnished brand from regulators.
And is basically a PR thing that was the Assumption incorrectly,
that many investors made, the reason I knew that wasn't the
primary reason they changed the name to the metaverse was
because I listened to one of the earnings call and I was able to
hear first-hand mark. Talk about the metaverse.
He was excited about it. He was not only excited he was
infatuated with it. It was the only thing on his
mind, he didn't really care so much about the core business of
Facebook or Instagram or Whatsapp or whatever is going
on. He had other people to manage
that stuff that was old news. Now stuff that he managed for
the past 10 years. He was done with that and he was
focused on something new, the metaverse.
And this is where I began to get really worried about this
investment. I thought that this might be a
situation where investors have No clue what they're really
invested in the CEO of this company who has total control of
it. All the voting rights has
changed his Direction entirely from the existing Legacy
businesses into. Just a meta verse company that
was the sole focus of it. And I came out with this video,
this one right here, one year ago, October of 2021.
The video title was be where investors I said investors and
Facebook beware warning, I have some news that I think is true.
About this company. I want to go ahead and play the
very beginning of this video. And again, this was October of
2021. When I made this video and meta
was trading at 280 dollars a share, it's currently at 88, you
know, I wish the title of this video was clickbait.
I really do. I wish.
I click baited you in and it really wasn't that big of a
warning but unfortunately this really is accurate.
There needs to be a warning to Facebook investors and that is
that I think, frankly I think a lot of Facebook investors don't
really know what Investing in right now and to some extent.
I didn't either until I listen to the Facebook earnings call,
and it became abundantly clear that I'm no longer just invested
in a social media company and Instagram and Facebook and a
Marketplace in a growing, a growing Network.
What I'm investing in is Mark Zuckerberg, dream of the
metaverse. That's what a lot of my money is
going towards, and to put it in perspective, this is not a side
project for Zuckerberg. This isn't some like Little
thing that he's doing that he's having fun with.
This is his entire Focus, you can listen to the enthusiasm on
the call. When he talks about the
metaverse, you can listen to where his priority and focus and
even the financial focus of the company has all the resources.
Everything's going into the metaverse, this is what he's
focused on and Facebook investors.
I don't think have really come to terms with this.
You're no longer just invested in this social media company.
You're invested in Mark Zuckerberg vision of the
metaverse. And some of you I don't Don't
even think know what that is. What is his vision of the
metaverse? What even is the metaverse to
begin with? Those are questions.
A lot of people have now after I raise the red flag last year
about Mark Zuckerberg Ambitions with the metaverse.
What do we have play out? Well, investors cried foul.
They said Mark, we don't like that.
You're spending so much money on the metaverse, ten billion
dollars seems a little bit. Excessive.
What did Mark Zuckerberg do? Did he go?
Okay, shareholders, I'm sorry that you have this concern.
We're going to rein it in a little bit.
We're going to pull back. No he didn't.
Increased capex. He spent more, he dedicated more
assets to the metaverse investors.
Screamed more foul selling out of the company.
Doing the one thing they can really do.
The stock price is dropping 20 30 percent and what is Mark
Zuckerberg do? Does he change gears and say
that his focus is now away from the metaverse and he's going to
focus on things with more predictable return on
investment? No, he triples down on the
metaverse, doesn't care what other shareholders are saying
doesn't care about his net worth dropping.
Take care about the directors, doesn't care about anything else
other than the metaverse. And this trend continues on the
stock price is down 75%. It's been completely devastated.
Morale at Facebook is devastated.
Employees are unsure of their future, their, they don't know
what's going on with their stock based compensation and their
entire employment. And what is Mark Zuckerberg to
he quadruples down on the metaverse?
And he says that is going to be the primary goal either get on
board. Or get off the train, get on
board with what I'm doing as CEO, and sole control of this
company, or go away, take a hike.
That's what Zuckerberg is messages.
And in those two choices, obviously, many investors have
chosen to take a hike, they've left and that's why the stock is
down 75%. Now, where does that leave us
now? We have a situation with meta
where the company is optically, cheap by just first glance.
It's trading at like a nine to ten forward P/E ratio that's
typically considered cheap as the Entire S&P. 500, is that a
17-4 PE ratio so metas at a low P/E ratio.
But that doesn't automatically mean the company's cheap.
And in the situation, I don't think the company's cheap
actually don't think it's that cheap.
Even given the low P/E ratio. Now, if you're thinking Joseph,
how's this company not cheap when it's trading at a ten
forward, P/E ratio, a very low P/E ratio.
Let me give you the full context of the current situation.
We have a CEO, Mark, Zuckerberg that owns 13.5% Company.
So you owns a little over 10% of the actual shares of the
company, but he has the voting power of 58 percent.
So even though he owns a minority stake a little over 10%
he controls the entire Destiny with no retribution.
No feedback doesn't care about anything else.
He's in total control. Now, this person Zuckerberg, the
individual controlling the destiny doesn't seem to be
concerned about Roi. It's not his primary Endeavor
right now is to get returns. He's already wealthy.
Remember he's Already even at a minimum even after this dramatic
drop worth tens of billions of dollars.
Some money's not a concern for him and this CEO that has total
autonomy can do whatever he wants with.
No retribution whatsoever is engaging in value destructive
Capital allocation. He's throwing money into
projects that are a furnace for money pouring tens of billions
of dollars into something that's giving incredibly low returns.
Even the forward expected returns.
This metaverse project are incredibly low and at the same
time, you have the CEO engaging in this value destructive act of
putting money into something with no foreseeable Roi.
You have other problems as well. Tick Tock is a problem.
YouTube shorts is a problem for meta, they faced intense
competition and basically everything that they're doing
their core, businesses are holding up, okay, in the face of
competition. But then you also have the
problem of apple and app, tracking transparency, that
alone is lowering the margins of Metas of Facebook's income.
It's lowering their ad margins. So they're having to deal with
that threat as well. They have multiple challenges on
multiple fronts and then worst of all any profits.
The actual core businesses generate get filtered in the
more capex for the metaverse. So the reward that we get from
the profitable businesses is being filtered and funneled into
something where we have no foreseeable Roi and you have no
say in what goes on, there's no recourse for the actions of the
CEO. So in my opinion, You know, when
I look at meta right now and I see it trading at a 12 for PE
ratio at 9:40 PE ratio that implies that investors are now
pricing in that the company is not generating value for the
investor. They're not going to generate
wealth for the investor that implies that this company is
actually doing things that is value destructive.
I have something that I've used frequently for my investments
called the evaluation framework. This is two different ways of
valuing a company that I look at for all my different Holdings.
One of Um, is based off the price to earnings ratio, plus
the ROC e, the Returns on Capital to companies getting and
the other ones based on the free cash flow and the free cash flow
growth. So we have two different ways to
value a company. Let's go ahead and just look at
meta as an example here. And you can see where I'm coming
from, where I don't think the company so mispriced right now.
The first way that we can value the company is based on the P,
e+ the earnings growth and our oce.
So let's go ahead and just check out these different metrics on
meta. We have a company where the
earnings growth is To move - the pasture was down 49 percent the
past two years. It has a compound annual growth
rate of - 22 %. You can see the obvious horrible
Trend here with the Ernie's going down.
Substantially this is a consequence of Apple exercising,
their control with ATT the app tracking transparency that has
lowered the margins for Facebook's ads.
We don't even know if they can ever recover the margins For
Those ads. So, the earnings growth seems to
not only be flat but it's actually declining over time.
The earnings are all the way back to where they were in 2017.
So the earnings growth right now, the visibility doesn't look
great. Now you can assume some earnings
growth even if we make an assumption that they're going to
grow earnings 10 or 15% year after year from here, which I
think is a very risky. Assumption.
Let's say that they grow earnings at 10% from here on
out. The next thing that we look at
with the earnings growth is the ROC e.
The returns a company's getting on its new Investments.
Now, this has been a bright Spot for meta for Facebook over the
past, decade the things that they've invested in, they've
gotten really good. Returns, they invested in
Instagram, they got really good returns investing in their Core.
Business was very profitable, the returns in 2021, we're
actually really good 32%, that's high, Roc e, but this is based
off of things. They've done in the past, their
core businesses, Instagram WhatsApp Facebook.
Those core Investments have led to very high are oce.
The question is, what is this going to look like over the
next? Next, five years and right now
the trend is going down metaverse Investments are not
having as good of a return as investments in their Core
Business. We can even see the similar
precipitous decline quarter after quarter all the way back
in 2020. Ever since Zuckerberg started to
spend money on the metaverse. The ROC is in Decline.
So when you look at the first way, valuing a company based on
the Roc and earnings growth, the problem is that we have no
confidence in this company that it will have above an 8% are oh,
Cee. And if it doesn't have above an
8% return on its capital employed, the company should
trade at a lower multiple a commodity, multiple should trade
around 10 to 12. So, based off this first way of
valuing meta. The companies, probably fair
value. It's probably right where it's
supposed to be. The only thing that would really
change, this is if you believe the are osce, the returns from
the metaverse are going to be far above 8% and my opinion.
I think that's highly unlikely. I think it's incredibly
unpredictable, I view it as a long.
Shot and I think it should be priced appropriately.
So that is exactly what investors are doing hair.
The next way that we can value. This is based on the free cash
flow and the free cash flow growth.
So you basically, look at the free cash flow yield plus the
free cash flow growth and you evaluate based on a discount
rate, that's above what you think.
The 10-year treasury will be, this is another very simple
straightforward way to value a company not first glance.
When we bring up meta, the free cash flow yield looks a lot
better. This is a really high yield 11%.
Now, the thing that you have to assume With the free cash flow
yield is that it will maintain and grow over time from the
level that it's currently at. That is a very important
assumption. The free cash flow yield is
backwards looking. It's based on the trailing 12
months, not the forward view. What has been happening over
time? Well this is the free cash flow
of meta over time. We can see the entire history of
the company. Again it was doing really good
during those early years growing free cash flows on a steady rate
and then what happened over the past couple of core.
Ders, it has completely evaporated their free cash flow
is completely gone. Last quarter was point three
billion dollars, 300 million. This is one of the lowest free
cash flow quarters ever in Mets history.
In fact, qual term shows this as a 96 percent decline year over
year. So the free cash flow has
plummeted. Well, what happened to the free
cash flow. Why is it just evaporating?
We can look at a couple different things here.
The capex, spend of the company has likewise exploded and
remember the calculation Free cash flow is amount of operating
income from the company - the capital expenditures.
That's how you calculate free cash flow.
When you see capex double in a six-month period, That's
alarming the capex. Just six months ago was 5.4
billion dollars. Now it's gone to nine point
three eight billion dollars and this is only one of the expenses
of the company. All the other expenses have been
going up as well. This company has been ballooning
in expenses and capex and general and administrative
costs. It's as the revenues have
flattened. The profitability has declined,
the margins have declined and the free cash flow has
evaporated. So we look at valuation method.
Number two, we need to assume that.
The company's free cash flow yield is not only stable but
it's going to grow on a continual rate, 10% or more year
of year. That's how we get a good
investment to has a high current yield and it's going to grow its
free cash flow over time. Can we safely make those
assumptions with a company like meta?
I don't know, maybe it will. Maybe Mark Zuckerberg will turn
it around. Again, he's the sole owner, he
controls all of this. He could make the company worth
a lot more by a Banning the metaverse plans.
Or by having those plans that long shot.
Be wildly successful and beating everyone's expectations again,
but again, if you look at this, either way, based off the risks
in the stock right now based off the expected Roi of the
metaverse. It looks appropriately.
Valued doesn't look substantially cheap.
Doesn't look too expensive. It just looks in the range in my
opinion of being Where it deserves to be the things that
could change it and if you're metaverse investor I think the
things that you'll want to see is either a good Roi on
metaverse pain. Seeing actual Revenue growth
from it and profitability from it or seeing Mark Zuckerberg
back off a little bit from those plans dedicate a little bit more
time and effort to your core businesses and all the problems
they're facing because right now Zuckerberg is not doing that.
He has alienated Wall Street, they want nothing to do with
him, all the confidence that he's built up over the past 10
years of running. These Businesses has been
completely lost, so there's my breakdown.
This is a tough one. I'm not saying this is an easy
investment but that's my take right now for me.
This one is just going to stick on the sidelines.
I'm going to wait it out and get more clear direction from what
the CEOs doing, what the direction of the company is.
So, I hope you enjoyed this little video.
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