Justin Sullivan
Premise – Not A Clean Story, But A Clear Risk/Reward Skew Now
We were neutral on Meta (NASDAQ:META) for a while for a few reasons:
- minimal valuation support in the face of needed earnings cuts
- continued structural engagement headwinds (reopening, reels transition, TikTok time spend competition)
- continued work through signal loss from IDFA
- Worries of high strategic focus and expenditure on metaverse moonshot
Additionally, when we plotted out the potential upside and downside cases at that point relative to our base case of reality, we just couldn’t pencil in enough upside to get the rating to Buy.
At this juncture however, even with internet advertising’s broader down cycle likely not having bottomed, and with roadblocks still very much ahead of Meta, we’re finding some reasons to pick up long exposure.
This isn’t 2020/21 where you could buy stocks with low risk (both market and economic) on the long-end with good catalysts, minimal idiosyncratic headwinds (unless the company was horribly managed), and secular themes behind them. Being long anything, tech in particular, meta in particular in 2022 is much more nuanced. So our time horizon on the name has shortened quite a bit. More specifically, our thesis is as follows:
- the bulls have largely left the stock (sentiment and price action are atrocious)
- the valuation is in the basement even on lowered estimates
- new management has an opportunity to clarify strategy on product and spend
- possible revenue/EPS surprises to upside w/improving targeting/attribution, cost cuts/decelerating spending growth, and midterm election tailwinds as well as easing comps into YE
In essence, when we look at the upside profile here from now until year-end, our optimism isn’t there on an absolute basis on the state of the company, merely relative to expectations.
And that’s how we view the market as a whole. Almost nothing is outright positive in the current environment, everything is relative to market perception and psychology.
So when we look at Meta trading for 13x consensus ’22 earnings estimates that have earnings down 29% y/y and with some potential catalysts into YE with sentiment where it is, it’s hard not to want to take a stab at it.
Long-Term View – Hard to Take A Firm Stance Right Now
Pessimist Take:
Our long-term belief on Meta is that the story is just too cloudy right now. From the macro level, you have headwinds going into 2023: Europe is likely already in a recession right now, with the US likely going into a recession in 2023. Ad spending, broadly, is cyclical, tied to rates of economic growth.
Digital penetration of overall ad spend is much higher than prior cycles of economic contraction (namely ’08), so digital spend is likely to be more correlated with the broader economy this time around. And then you should consider the fact that Meta has millions of SMB advertisers, advertisers that are inherently more sensitive to changing macro winds relative to global brands.
Overall, while comps are starting to get easy for growth rates, the macroeconomic picture is deteriorating, and will likely continue to deteriorate at least into next year, as the economy absorbs tighter fiscal and monetary policy.
Then you have the company/ecosystem related problems. These issues include Meta’s continued competition with other advertising players, namely TikTok (in brand spend) and Apple (NASDAQ:AAPL)/Google (NASDAQ:GOOG) (NASDAQ:GOOGL) (in direct response). Recently, third parties have been saying that ad targeting, measurement, and attribution has been improving on Meta’s platforms, which is a step in the right direction. However, the structural risk of less data to target ads with relative to a player like Google means that SMBs who built their businesses on Facebook/Instagram ads are likely to shift budgets (which likely shrink because of macro).
In short, competitively Meta isn’t in a great place. On one hand, you have TikTok which is changing social media engagement trends and forcing management to pivot to Reels. On the other hand, you have competitors in direct response emerging (see Apple’s push into app install campaigns) that could eat into Meta’s massive advertiser base.
Optimistic Take:
Don’t count Zuckerberg out. This company has been around since 2004, and it has withstood numerous transitions that were supposed to be company-breaking:
- web to mobile
- Snapchat and the stories phenomenon
- Cambridge Analytica scandals and other PR damage
- GDPR
- Anti trust regulation
All we’re saying is that yes, the headwinds are real. Yes, they may be Meta’s most existential and daunting headwinds since the company was formed (questionable, but okay). That being said, you have a founder-operator who has weather past storms, and maybe we should give him a little bit of credit or at least benefit of the doubt for that.
The optimistic long-term take is this: the company leans up on costs, has a hit product between Oculus and Meta Horizons (metaverse), invests in AI/ML 1P signal generation pay off, and Reels is a success.
In essence, the long-term bull case is Meta gets its mojo back. The economy gets out of the slump by 2024, ad budgets reaccelerate, and Meta is able to more properly defend its massive share of SMB advertisers.
Conclusion – The Streets Sure Are Bloody…
Meta has brought the value investor crowd flocking to it with its low multiple, share buyback, and recognizable brand. And while we’ve generally stayed away in the past because of its markings of a value trap, we find the story just too enticing into YE with valuation and sentiment where they are.
The way we look at it, for a trade, you really don’t need that much to get the stock working. If you get a situation where (a.) company guides ahead of Street on revenue (because of midterms and improving ROAS particularly) and earnings (decelerating/declining costs), (b.) new management surrounding Zuckerberg lays out strategy (boosting confidence from the Street and setting tempo for the new regime), and the macro environment stays strong enough, the stock likely rallies.
You can’t trade at 13x earnings forever…
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