Discover the intricate workings of a social media colossus as Clem Miller joins us to dissect Meta Platforms, the company soaring past a $1 trillion market cap. Our conversation takes you behind the scenes of Facebook, Instagram, and WhatsApp, revealing how these household names translate likes and shares into a torrent of advertising revenue. As election year fervor mounts and events like the Olympics are set to spike ad spending, we scrutinize Meta's position amidst this bustling marketplace and its adherence to new EU anti-disinformation laws—developments that could very well reshape their global operations, including in the US.
Venture with us into the futuristic foray of Meta's ambitious metaverse initiative and the burgeoning role of generative artificial intelligence in advertising. Clem and I critically evaluate how these bold moves could impact Meta's revenue trajectory in 2024. With the spotlight on Mark Zuckerberg's vision, we consider whether this tech giant can maintain its momentum or face a slowdown as it expands into virtual reality. Whether you've got skin in the game as an investor or you're simply captivated by the relentless evolution of digital platforms, tune in for an enlightening chat that's as much about the numbers as it is about the narrative shaping our digital landscape.
Discover the intricate workings of a social media colossus as Clem Miller joins us to dissect Meta Platforms, the company soaring past a $1 trillion market cap. Our conversation takes you behind the scenes of Facebook, Instagram, and WhatsApp, revealing how these household names translate likes and shares into a torrent of advertising revenue. As election year fervor mounts and events like the Olympics are set to spike ad spending, we scrutinize Meta's position amidst this bustling marketplace and its adherence to new EU anti-disinformation laws—developments that could very well reshape their global operations, including in the US.
Venture with us into the futuristic foray of Meta's ambitious metaverse initiative and the burgeoning role of generative artificial intelligence in advertising. Clem and I critically evaluate how these bold moves could impact Meta's revenue trajectory in 2024. With the spotlight on Mark Zuckerberg's vision, we consider whether this tech giant can maintain its momentum or face a slowdown as it expands into virtual reality. Whether you've got skin in the game as an investor or you're simply captivated by the relentless evolution of digital platforms, tune in for an enlightening chat that's as much about the numbers as it is about the narrative shaping our digital landscape.
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Steve Davenport:
Hello and welcome to Skeptics. Guide to Investing. This is Steve Davenport and I'm here with Clem Miller and in this episode we're going to talk about Meta platforms, or one of the so-called Magnificent 7. Meta recently reached $1 trillion, that's trillion with a T market cap. Clem and I think 99% of our audience knows what Meta does, but for those 1% who don't, can you briefly describe the business?
Clem Miller:
Sure, so Meta is a social media and communications company. It has three major products, which many of you know about Facebook that was their initial product Instagram and WhatsApp. So those are their three major product lines.
Clem Miller:
So, how do they make money, Clem? So they make money off advertising. It's really that simple. I recall in a famous conversation Mark Zuckerberg, the leader of Meta, was testifying to the US Senate and Senator Orrin Hatch asked a very. He was confused, let's say, about what Meta does, and so he asked a question well, Mr Zuckerberg, how does Meta make money? And Mark Zuckerberg, without laughing too much, said well, sir, we advertise, we sell advertising. I thought that was funny when he said that.
Steve Davenport:
Yeah, well, it was also advertising that it does for political candidates and how it helps those political candidates can sometimes be what was implied in that question Is it Clem?
Clem Miller:
Oh, I would certainly say so, and there's a lot of concern.
Steve Davenport:
I'm not defending Congressmen asking stupid questions. Believe me.
Clem Miller:
You know there's a lot of concern in political circles about how social media whether it's ex, formerly, twitter or Facebook or you know any TikTok more recently to the degree to which these companies, these social media companies, are able to influence political elections, and not just you know what somebody wants, right?
Clem Miller:
So I would, you know, I think that there is some concern. These are legitimate concerns and have led, in the case of the EU, to actual legislation to try to rein in some of the excesses of these companies, and so far at least, you know, there's been some cooperation from the social media companies with the EU. But that's its early days, and there's an interesting question that arises from that, which is how does a company like Metta adhere to some of these anti-disinformation laws coming out of Europe without at the same time violating the First Amendment? And it could, be like in so many other things, that EU legislation actually drives global behavior, and so you might actually have Meta sort of changing some of its policies in the US in terms of, you know, allowing their platform to be misused.
Steve Davenport:
So growing revenue at a fast rate is always a challenge for companies, especially when they get so large right and they have huge revenues. Do you think Meta will have a good 2024 revenue, wise now that it's an election year?
Clem Miller:
Well, you stole the thunder from me, Steve. I was going to mention that, that you know they're going to do very well this election year. And not only that, but you've got the Olympics this year as well, and so that's going to be helpful for advertising. If you look at what the expectations are among analysts, they're actually for their for about nine to ten percent revenue growth for 2024, which is which is pretty strong when you consider how big meta is already. But also that's actually down that, but not that. Nine to ten percent is actually down from the seventeen percent annualized trailing annualized over the last three years and twenty percent Trailing annualized over the last five years. So the revenue growth is continuing at a nice pace but, you know, is indeed decelerating.
Steve Davenport:
Well, I think at the size of that. I mean, I don't know how Advertising revenues and you know, does it very much based on the continent or the, the size of the economy, or are they finding that they can make more money in advertising in areas that might not have as good a media?
Clem Miller:
Well, I think one of the things that they're they're doing now to try to leverage their activity is, as so many other companies are doing, is using generative artificial intelligence, and so they're starting to use that In terms of their advertising targeting nice.
Steve Davenport:
I believe many of us have heard of Mark Zuckerberg's enthusiasm regarding creating virtual reality devices, (VR). Zuck called this a metaverse, even in the company, from Facebook to Meta to reflect his new emphasis, the so-called metaverse one a thousand thematic investment Commentaries. However, by late 2022, Zuck has dialed back his enthusiasm. You could barely hear a peep about the metaverse. Why did Zuck shift course so quickly?
Clem Miller:
It had to do with investors not believing in the metaverse. So what? What Meta did? What Zuckerberg did is he pumped billions of dollars into the reality labs division, met as reality labs division and, as it became clear that it wouldn't generate any real commercialized products anytime soon, he would then start talking about how it could be three years, five years, ten years, before any real commercialization happened. That kind of freaked out investors who want an earlier return on larger investments, and so they investors penalized Metta for that. The stock price basically collapsed in 2023. I'm sorry, 2022 the stock market collapsed.
Clem Miller:
Given this, this emphasis on Meta, I think many investors actually thought meta was kind of a Zuckerberg vanity project, kind of like what you see with with Elon, elon Musk and his various endeavors. So, and so they, you know, they put they, they penalized, they penalized Zuckerberg and meta. However, over the last okay, so that's changed around in 2023 and basically Metta embarked on its so-called year of efficiency. So lots of workers were laid off in 2023. And actually that's helped Metta, the fact that they decided to shift course and become more efficient. Over the last 12 months through January 30th, Meta's share price has increased by 172%. Yeah, you heard that right 172%. So that's investors looking at these efficiency initiatives and thinking, wow, on the basis, on the back of this strong revenue growth and earnings and operating efficiency improvements, we expect Meta to do really great over the next few years.
Steve Davenport:
So I'm not going to take apart what Zuckerberg says, because he's a lot smarter than I am, because he has a lot more money. But efficiency couldn't he have his workers do things differently or work in other areas vs laying people off. The solution for everybody who wants to have an operation that's more efficient, Clem, Because that seems to me to be the easy choice versus the hard choice of actually focusing on the effort in the right areas.
Clem Miller:
I think you're right. I think that we're dealing here with Silicon Valley, and Silicon Valley has, I think, a different ethic when it comes to employment. Companies, there are more layoffs. There's more what we'll call. There's a famous economist named Shumpeter who talked about creative destruction. I think that's a great way of talking about Silicon Valley. You have companies that layoff people. You have companies that go out of business, but the individuals who are involved, who have great engineering skills, scientific skills, they're picked up by other companies. So it's a question of creative destruction.
Steve Davenport:
So you think that Zuckerberg is trying to release that talent to other people to help the industry overall?
Clem Miller:
No, I don't think they're trying to help other industries. I think what they're doing is they're saying in order to satisfy shareholders which include me, by the way who needs to be satisfied in order to satisfy shareholders, what he's doing is he's creating a leaner, meaner company in order to do that, in order to boost up his share price.
Steve Davenport:
All companies. The shareholder price is the only thing that we need to focus on Clem. Oher stakeholders like the community ,t he environment and other things get some attention from corporations.
Clem Miller:
Well, now we're getting into the whole ESG area. We've done a podcast on that and I'm sure we'll do future podcasts on that. Is it shareholders who are the key audience, or is it stakeholders beyond shareholders who are the key audience? I understand.
Steve Davenport:
I like them to keep you happy. Clem, because that's something. I also just wonder sometimes whether, reacting by laying off people because that's what an analyst recommend, it seems to me that might not always be the quid pro quo you want to engage in.
Clem Miller:
Well, one of the things that I wanted to talk about was the glass door rating for Meta. Meta has a 3.9 glass door rating. Some of the other tech companies in Silicon Valley and beyond have ratings of 4.0, 4.2, 4.3. So clearly, meta's glass door rating, which measures employee satisfaction, have been diminished by these layoffs, and so one can take that into effect and say well as a quality proxy and say well, there's some dissatisfaction with this process. But overall, what publicly traded companies try to do is they try to satisfy their shareholders.
Steve Davenport:
No, I'm saying that I need to satisfy shareholders. It's where I'm just asking whether it's. You know, there might be some question as to whether sometimes Zuckerberg you know he likes to engage in these things until there's a point at which he gets some feedback that affects his share price. That that's what motivates him, so I'm fully aware. What do you think about profitability and free cash flow for these looking at Meta.
Clem Miller:
So, yeah, this is a really strong company, profitability wise. So net interest margin that's, the net profit divided by revenues is 23%, and free cash flow is also 23%. So free cash flow is the amount of cash generated by a company that's available for acquisitions, that's available for buying back shares and is available for dividends. Now, Meta does not pay dividends yet, but it does buy back a lot of its own stock, and when a company buys back stock, each you know each remaining share of stock is worth more, and so you know that's a great.
Steve Davenport:
You know there's also issuance to management, right? So it's really the net of issuance to management minus buyback. That's correct and change the total. So I know that they're trying to help the, but there's a there's an employee aspect to this too, right, and management aspect right, it's more of a net buyback as opposed to a gross buyback.
Steve Davenport:
So, metaverse being challenging TikTok and Google's YouTube shorts with its Reel product, it's also challenging Elon Musk's X with its Threads product. Given Metaverse experience, do you think it's a bit of a reach to make any conclusion about reels or threads, or is it clear that that was a good move?
Clem Miller:
Well, I'd say it's definitely too early, it's not. It's not a gimmick. I call it a gimmick, like the Metaverse, because you already have products out there that are selling, namely X and YouTube shorts and TikTok. But those are very well established products TikTok, youtube shorts and X you know the Twitter product. So it's going to be hard for Zuck to be able to penetrate those markets and do well. So, yeah, I am skeptical about the ability of Meta to break into those established markets.
Steve Davenport:
The one complaint about the tech stocks tends to be that they're expensive. How does it look on valuation?
Clem Miller:
Pretty good. On a forward price to earnings ratio, they're at 28%, which 28 times sorry, 28 times forward PE. That's not expensive as far as a tech-related company is concerned.
Steve Davenport:
Not 23% Using the PEG ratio that's pretty.
Clem Miller:
Yeah, I was going to say the PEG ratio is only 1.4 times on a forward basis. That indicates that it's pretty cheap too, but that's because you've got expected rapid growth still. Yeah it's not that expensive.
Steve Davenport:
I know you look at short-seller interest when you're thinking about these names. How does Meta do on this short-seller interest?
Clem Miller:
Pretty good. It has a short-interest ratio of 1.22%. Basically, what this means is that short sellers who expect a stock to go down really haven't shown much interest in looking at Meta as a stock that they might want to attack. Some of the stocks that are out there that they might want to attack have short-interest ratios of 5%, 7%, 10%. When you remember what happened with those banks on the West Coast last year, they had short-seller ratios before the crises of 10%, 15%, 20%. Just crazy. 1.22% is pretty attractive.
Steve Davenport:
We have a question in the mailbag and we've talked about it here, but do either or both of you invest in Meta? Can you tell us what portion of your portfolio you hold in the stock? I'll go first and say that we do hold Meta in our growth portfolio. The growth portfolio is benchmarked against the S&P growth and that has a large percentage in technology, our core portfolio, which has a smaller percentage in technology. We sold basework for Meta but we kept it in our growth portfolio because that has a higher percentage. When you think about, if I have to only pick 12 names and they reach 2% or 2.5%, it doesn't make the cut in the top 12, but if I pick 16, 17 for the growth portfolio, it does make the cut. I would say that we are somewhat positive. But we also have some questions about whether regulation and other items could start to be a challenge as Congress starts to imitate Europe and start to be concerned about some of the privacy and other issues with the stock. What about you?
Clem Miller:
Clem, I have about 2.5% right now in Meta of my portfolio. I have larger proportions in Microsoft and in Alphabet, which is Google. I have sold off my Apple position recently, just by comparison, and I have never owned Tesla because I have issues which we talked about in a prior podcast. I have a position overall. Despite some of the issues that we have talked about on the regulatory front. I do see Meta as being able to handle those issues. I do have that significant position there. This is my portfolio. I have a lot of positions in it, not just a growth portfolio. I have a lot of what you would call value stocks in here, in a sense, 28% forward PE, 1.4% forward peg not necessarily purely a growth stock, as some other stocks might be.
Steve Davenport:
Well, I think that's a great analysis, Clem, and I appreciate all your insights. Thank you to all our listeners for checking in with us. If you enjoyed this podcast or any of our other podcasts, please like, share and subscribe. Thanks a lot and look forward to talking to you again.