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. This overview if you like this type of content, check out the patreon. There's a link in the
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