META PLATFORMS (NYSE: META)

M RATING: BUY
EQUITY RESEARCH – TECHNOLOGY SECTOR 29/9/2022

ANALYSTS 2022 Q2 Earnings Highlights

• Net sales decreased by 1% y/y
Jacolm Kueh • Net income decreased by 36% y/y
Jacolmkueh@gmail.com • Adjusted EBITDA decreased by 19% y/y
• EPS decreased by 1.2 y/y
Tay Wei De
Tayweide2112@gmail.com Investment Thesis
• Financial metrics suggest that the company is
BASIC INFORMATION currently undervalued and has huge upside
Last Closed Price: $141.95 potential
• Massive growth potential as the company
Target Price (12M): $245.30 (+72.81%)
looks to expand its growth into the Metaverse
Target Price (5Y): $516.73 (+364.02%) industry
Ticker: META • Meta has been rapidly seeking to improve its
Sector: Technology weakest pillars of ESG (S&G)
Sub-Industry: Social Media, Metaverse • Meta has been doing exceedingly well in
upholding CSR for the environmental aspect
COMPANY DESCRIPTION
Meta Platform, Inc operates in two segments, Valuations
Family of Apps and Reality Labs. The Family of Using a financial statement forecast model
Apps segment’s products include Facebook, with an integrated discounted cash flow
Instagram, Messenger and WhatsApp. The model for a 5-year forecast period, our 5Y
Reality Labs segment provides augmented price target for META Platforms is $516.73.
and virtual reality-related products Our 12M price target from the date of
comprising virtual reality hardware and valuation is $245.30.
software such as the Meta Quest to build out
the metaverse. Investment Risks
• ESG related risks could potentially paint the
KEY FINANCIALS company in a bad light
Market Cap (current) 377.36 billion • Potentially decline in user base of Meta’s
Basic Shares O/S 2.713 billion social media platforms due to bad publicity
52-Wk High $353.83 • Apple’s privacy updates could continue to
disrupt the company’s revenue growth
52-Wk Low $134.12
• Outcome of Meta’s fight against Apple’s
Fiscal Year End 30/12/2022
privacy changes
• Four-decade high inflation and two
(US$ M) FY20A FY21A FY22E FY23E consecutive quarters of negative GDP growth
Revenue 85,965 117,929 119,108 132,448
signals a technical recession
Gr Rate(%) 21.60% 37.18% 1.00% 11.20%
• Fed’s hawkish stance where they seek to raise
EBIT 32,671 46,753 38,115 42,383
interest rates to combat inflation
Margin(%) 38.01% 39.65% 32.00% 32.00%
• Negative investor sentiments towards the
EBITDA 39,533 54,720 55,521 64,217
Margin(%) 45.99% 46.40% 46.61% 48.48% market which caused many stocks to hit 52-
week lows and META is no exception
Figure 1: Revenues of social media companies
Figure 2: Meta and Facebook logo
Figure 3: Meta’s revenue breakdown
Industry Overview
Meta Platform, Inc, formerly known as
Facebook, Inc, operates primarily on social
media platforms such as Facebook and
Instagram. As the industry matures, more
competitors such as Tik Tok are joining the
market, which has been rapidly expanding
and eating into Meta’s revenue and user
numbers. Moreover, With Apple introduced
the app tracking transparency, which enables
users to choose if they want to allow tracking
outside of the app they are using, affecting
Meta’s source of revenue.
Company Description
Meta Platform, Inc operates in two segments,
Family of Apps and Reality Labs. The Family of
Apps segment’s products include Facebook,
Instagram, Messenger and WhatsApp. The
Reality Labs segment provides augmented
and virtual reality-related products
comprising virtual reality hardware and
software such as the Meta Quest to build out
the metaverse.
Company Business Model
Meta’s main source of revenue is through its
advertisement through its various social
media platforms, which stand for 97.5% of the
company’s total revenue. Revenue is earned
by selling advertising space to marketers and
using Meta’s user data database to efficiently
reach the marketer’s targeted audience based
on user interest and recent searches. With the
issues Meta is facing in the social media
industry, it has started to restructure itself by
diverting its revenue by expanding to the
argument and virtual reality market. Meta has
been doing so since 2018, with the release of
Oculus Quest, now called Meta Quest,
standing the company revenue of 1.9% while
the other revenue stands at 0.6%. The urge of
rebranding had been especially significant
with the change of example the company’s
name and vision to show the determination of
Meta shifting its main focus from its social
media platforms to augmented and virtual
reality products and services to build out the
metaverse.
Figure 4: Meta’s DEJI score
Figure 5: Meta’s DEJI score
Figure 6: Industry comparison of META’s ESG
Figure 7: Industry comparison of META’s ESG
ESG Analysis of Meta
How does META stand amongst its
competitors in terms of ESG?
In recent years, Meta performed fairly on the
ESG side with the company lagging behind on
the aspects of S&G but was outstanding on
the environmental aspect. This was largely
due to the company not having ethical
corporate governance principles. Meta’s
performance is dictated by the S&P DEJI ESG
score, and the score for each aspect of ESG is
listed.
Other than Meta failing to meet expected ESG
standards in the past few years, its
competitors are also getting better in their
efforts towards sustainability, and that caused
Meta to be dropped from the S&P 500 ESG
index in 2019. This score is based on a
comparison with the company Meta and the
top 500 companies in the US in terms of ESG .
Also based on Sustainalytics, one of the top 10
ESG data providers, Meta is being rated as a
high risked company for its ESG risked rating
with its rank at 996 out of 999 companies in
its industry and its controversy rating being 4
out of 5. Meta had scored the lowest out of its
known competitors in the software services
that Sustainalytices categorised Meta as. This
indicates that the company needs to ramp up
its efforts in order to reach the same ESG
standards of its competitors.
Figure 8: Meta’s PUE Environmental
Till date, Meta has achieved net zero carbon
emissions in their global operations. The
company is supported by 100% renewable
energy which was done by reducing emissions
by 94% from a 2017 baseline and supporting
carbon removal projects. In 2021, 21 of
Meta’s offices received the LEED Gold
Certification, with 50 offices globally receiving
this certification till date.
Figure 9: Meta’s WUE
Meta’s data centres account for the highest
percentage of Meta’s energy use, water use
and GHG emissions. However, Meta operates
at a level far more efficient as compared to
the industry average. Through different
building strategies such as prefabrication,
Meta seeks to reduce the amount of
construction waste in order to reduce the
carbon footprint. The company is also testing
Figure 10: Meta’s renewable energy progress low-emission construction equipment with
hopes that these can be used globally in all
their construction sites.

Meta is also currently working toward net

zero value chain emissions, mainly done by
reducing the company’s Scope 3 emissions. In
line with this goal, Meta launched the
Responsible supply chain (RSC) programme. In
2021, the company engaged with 40 suppliers
to identify GHG reduction opportunities
within their operations.
Figure 11: List of Meta’s privacy issues
Figure 12: Bullying, harassment stats Q2’22
Figure 13: Covid-19 pop-ups
Social
Meta has not been able to uphold the
expectations of social responsibility despite
being the biggest social media company, with
failure to protect its user’s data and privacy as
the core problem. One such incident was the
Cambridge Analytica scandal that
compromised the private data of about 87
million Facebook accounts worldwide.
Coupled together with other such incidents, it
shows weakness in this area and suggests that
the company needs to ramp up in efforts to
mitigate such risks.
The company has been stepping up its
continued efforts to regulate discrimination
and hate speech, with stricter community
standards and guidelines in place for users to
follow. Content that has been labelled as
malicious will be taken down by moderators
and the user may face a permanent ban or
suspension from the particular social media
platform.
In the light of the Covid-19 pandemic, Meta
has ramped up its efforts in combating
misinformation by reducing distribution of
information that is deemed false by the fact-
checker, as well as adding pop-ups to
information provided by the CDC and WHO on
covid-19 related posts.
Figure 14: EU GDPR and CCPA information
Figure 15: Meta’s shareholder voting power
Figure 16: Impact on shareholders on results
Governance
Data protection and privacy not only concerns
the social aspect, but it also affects the
governance aspect of ESG as privacy
regulation has moved from principle-based
requirements to heavy governance
and accountability-based legislation. This is
most notable in the EU’s General Data
Protection Regulation (GDPR) and the
California Consumer Privacy Act.
Meta uses a share class structure where the
normal shareholders can buy Class A shares,
of which there are roughly 2.4 billion in the
market that affords them one vote per share.
However, Zuckerberg and a select group of
others own Class B shares, which affords them
10 votes per share. There are roughly 440
million Class B shares and Mark Zuckerberg
personally owns nearly 360 million Class B
shares, and through agreements with other
Class B shareholders, controls the vote of
another 32 million. That gives him control of
about 392 million Class B Shares which is
about 81% of the total.
Although Meta is not the only company who
has such a structure, its structure disregards
shareholders’ rights of exercising the right to
vote. An example is the proposal by
shareholder-advocacy firm Proxy Impact
where Lisette Cooper has shared that her
daughter was groomed by a predator on
Facebook. When all votes were counted, the
proposal only received 17% support, with 980
million votes in favour and 4.7 billion against.
That would seem to be a clear rejection of
that proposal. However, if the Class B shares
are excluded the resolution would have
received majority support at 56%.
 Financial Analysis

Meta’s financial statements

Ratio analysis
Meta has maintained a strong financial
position over the last three years and is at
very low risk of facing bankruptcy. Despite the
decrease in current ratio, Meta is still able to
easily cover its working capital liabilities
immediately as it has more than three times
the amount of working capital assets to
finance its short-term debt obligations. The
company has maintained an excellent D/E of
<1%, far lower than any of its competitors.
This metric indicates that Meta is not over
leveraged as it mostly uses company
resources to finance its operations rather
than debt.

As of 2021, the P/E ratio of Meta, which has

decreased over the last three years, is the
lowest among the competitors selected for
comparison. Meta has also seen a decrease in
its P/FCF and P/S ratios. In comparison with
the S&P 500’s average EV/EBITDA of 17.12 at
the end of FY 2021, Meta has an above
average enterprise multiple. The EV/EBITDA
of Meta has decreased over the last three
years, indicating that the company’s valuation
is becoming increasingly attractive. In
comparison to the selected competitors, Meta
has the most outstanding valuation metrics
amongst all as of FY 2021.

Moreover, the increase in Meta’s ROA, ROE

and ROIC suggests that the company is
increasingly efficient in generating cash flow
based on its assets, equity and capital. The
increase in these metrics signifies increasing
profitability of the company.

The ratios and valuation metrics hence

indicates that Meta is of a strong financial
position, of good value and is a good
investment. Based on the comparison and
analysis of the ratios where Meta has a good
standing among its competitors in both
sectors, our current position is that Meta is
undervalued.
 Forecasting Models

Financial statement forecast model

Growth assumptions and model plugs
DCF model and WACC calculation
 Investment Thesis

Based on our analysis, we gave Meta a buy rating as we believe that the company is currently undervalued based on
its financial metrics, and that the company has a huge potential in mitigating and improving the areas in which they
are currently lacking behind its competitors. However, there have been recent factors that resulted in poor
performance of the company’s stock, and coupling it with the unfavourable macroeconomic conditions, Meta’s stock
fell to a fresh 52-week low of $134.12.

As society progresses and individuals start to be more conscious about how corporations play a part in impacting the
lives of people and the environment, ESG has become a huge part of an individual’s reason to invest. Companies
have been rolling out initiatives to uphold Corporate Social Responsibility (CSR), and Meta is no exception. However,
Meta has not achieved a level that the public expects of a company of its scale and influence, and that has resulted
in headwinds for its social media business. Recent incidents such as the Frances Haugen whistle-blower incident
resulted in bad publicity for the company, and that can be reflected by a dip in the company’s share price after the
media reports. Meta has the potential to continue excelling in the areas of ESG that they have done well in, and have
been continuously seeking to improve on the areas which are of concern to the general public. Overall, the company
has performed fairly in the aspect of ESG, continuously performing exceedingly well in the environmental aspect in
comparison to its competitors. However, the company has a lot of room for improvement especially in its social and
governance aspects. The company has rolled out many plans and initiatives in order to address certain problems
such as misinformation and discrimination, such as improvements to its privacy policy and the rolling out of its
Climate Science Centre. As the company continues to step up its efforts in combating the current risks that may
result in company turmoil and public discomfort, such headwinds are inevitable as the company seeks to grow its
businesses. We strongly believe that if Meta fully commits to making changes and constantly improves its ways of
operations, the company will gain a stronger foothold in the field of ESG.

The company’s financials indicates that the company is currently undervalued as indicated by the financial ratios of
Meta in comparison to its competitors, and is currently of a stable financial position with a low risk of facing
bankruptcy. The company has a very low debt-to-equity, indicating that it operates mostly using its own resources
instead of borrowings and is not over leveraged. The company also saw an increase in revenue and profits over the
years, indicating growth. The corresponding ROA, ROE and ROIC has increased over the last three years, indicating
that the company has massive growth potential and is able to generate good returns using the resources it has. This
is expected to continue as the company expands its business into the Metaverse industry that has been gaining
attention from other big players in the field.

Changing the direction of the company from a purely social media based business into a company invested in the
Metaverse gives Meta the potential to achieve significant growth through the diversification of its business. The
Metaverse market is projected to reach US$824.53 billion by 2030, growing at a CAGR of 39.1% from 2022 to 2030.
Although the potential of the metaverse is big, its definition and future is still not clear and optimistic. Meta would
have to continue to monitor the risk of the metaverse market before considering going more in-depth for the next
few years as the market is still new.

To sum up, Meta is a company with massive growth potential as it seeks to enter the Metaverse market and is a
company that will set out to achieve greater heights despite the challenges thrown their way. The company will
continue to seek solutions for problems faced in the various aspects of, and continue implementing solutions to
combat them. The company also looks to continue increasing their standing amongst the public eye, rolling out many
initiatives to aid in shaping society towards the greater good. Additionally, the company has outstanding financial
metrics, and looks to be undervalued and a great buy amongst its competitors in both the social media and
Metaverse spaces. Even though the company stock has currently taken a big hit due to varying factors, with its stellar
financials and its willingness to perpetually improve the company. we expect the stock to bounce back and soar
higher than the high it reached as the company continues to expand and grow.
Figure 17: Data on social network popularity
Figure 18: Meta’s privacy centre information
Figure 19: Survey on privacy and data, Insider
Additional consideration 1
The first significant ESG related risk Meta is
facing is its data protection and privacy that
was mentioned earlier in the ESG analysis
section. Users nowadays are getting more
concerned about their personal safety when
using social media. We can see that due to
various data protection and privacy issues,
Meta has lost about 500,000 of its active daily
users with users changing to use alternative
social media platforms such as Telegram.
However, Meta still remains the largest social
media platform with the most daily active
users. Although the loss of users is currently
of a small scale, it may become more
prevalent if the number of daily active users
continues to fall. If this were to continue, the
revenue Meta derives from its social media
business may decline significantly.
In order to address this problem and prevent
such an occurrence from happening, Meta has
been improving its data protection and
privacy by increasing the transparency of its
various social media platforms. They have
increased transparency by introducing a
privacy centre where users get to understand
more about how Meta collects and uses their
information. Through the privacy centre, it
has helped to educate users about Meta’s
approach to privacy by giving users
information on their data policy, while also
making privacy and security controls more
business-friendly by offering guidance and
controls related to common privacy topics.
Additionally, Meta can do more to increase
user’s confidence when using its social media
platforms by establishing a quick-response
security team. Although Meta currently has
security teams in place, the company needs to
come up with a top-notch team of
professionals that are constantly sniffing out
issues across the social network, such as
searching for phishing scams and for malware
that has found its way onto the site. If Meta
can demonstrate to users that the company
places users’ security as their top priority and
puts a quick-response team in place to limit
the impact of potential privacy breaches, it
could significantly improve its chances
of increasing user trust.
Figure 20: Data on misinformation types
Figure 21: IFCN logo
Figure 22: Meta’s misinformation warning
Figure 23: Meta’s account ban notice
The second significant ESG related risk Meta is facing
is the tackling of misinformation and disinformation.
During the Covid-19 pandemic, there were many
incorrect interpretations of health information as
people were getting concerned about how such a
health crisis will impact their daily lives. Majority of
the misinformation was on how the vaccines would
impact individuals while others were pandemic-
related speculations. Additionally, the publishing of
climate disinformation which contains deceptive or
misinformation content has been increasing in
frequency. This misinformation will cause the spread
of false or discredited science and would give the
public a false narrative on the matter. As social media
is the most accessible platform to get the newest
news, the effects of misinformation and
disinformation could prove costly as public attitudes
could be shaped wrongly in regards to the matter,
hindering the ability of authorities to solve the various
issues.
In order to mitigate this risk, as mentioned earlier in
the ESG analysis section Meta had been collaborating
with various authorities. For tackling misinformation,
Meta has partnered with more than 80 independent,
third party fact-checking organisations who are
certified through the nonpartisan International Fact-
Checking Network (IFCN) to identify, review and take
action on this content. Misinformation will be
distributed to fewer people through the use of
algorithms. Meta will not only show warning labels
with more context for people who do happen to
stumble upon them, but also for those who are trying
to share or already have shared the content. For
accounts that post misinformation repeatedly will see
their overall distribution reduced and may lose the
ability to advertise or monetize. This will be after
confirmation from fact-checkers as well as climate
organisations that the content posted contains
incorrect information.
Figure 24: Climate Science Centre page
Figure 25: Data on user logouts from FB
Regarding climate change, Meta has created a Climate
Science Centre to combat climate disinformation.
Functions of the centre includes working with known
organisations to ensure information Meta features are
timely and accurate, as well as creating a section
where it includes common misconceptions of global
warming through working with experts from Monash,
Yale and Cambridge to directly address climate
myths.
We had seen that Meta had done exceedingly well in
tackling misinformation and disinformation over the
years, but the company was too slow in implementing
its measures as its reputation on tackling these had
taken a hit. In order to restore and increase the
company’s reputation and trust of the public, Meta
would have to do more. As misinformation and
disinformation is a never ending matter, the company
has to continue improving its strategies to combat this
issue and prevent misinformation and disinformation
from slipping through the cracks. Meta could also
teach users how to identify misinformation and
disinformation in social media so that it can efficiently
use the power of crowdsourcing. If users know how to
identify fake news and real news, they can help with
reporting the fake news to be taken down. This would
also lead to lesser users falling prey as immediate
action is taken .
 Appendix
2021 sustainability report. Meta Sustainability. (2022, August 1). Retrieved September 30, 2022, from

https://sustainability.fb.com/2021-sustainability-report/

Lauricella, T., & Norton, L. (2021, October 7). How Facebook silences its investors. Morningstar, Inc. Retrieved
September 30, 2022, from

https://www.morningstar.com/articles/1061237/how-facebook-silences-its-investors

Meta. (n.d.). Annual Financial report. Meta - Financials. Retrieved September 30, 2022, from

https://investor.fb.com/financials/default.aspx

Research, V. M. (2022, July 13). Metaverse market size worth $ 824.53 billion, globally, by 2030 at 39.1% CAGR:
Verified market research®. Metaverse Market size worth $ 824.53 Billion, Globally, by 2030 at 39.1% CAGR: Verified
Market Research®. Retrieved September 30, 2022, from

https://www.prnewswire.com/news-releases/metaverse-market-size-worth--824-53-billion-globally-by-2030-at-39-
1-cagr-verified-market-research-301585725.html

Financial ratios were gathered with reference to Old School Value: https://www.oldschoolvalue.com/