joshua tai

joshua tai

08-04-2022

13:00

A Deep Dive on $FB (Meta) Meta is the biggest social media network company, with 2.8 billion users, and a leader in the development of the Metaverse. Here's everything that you need to know about Meta. Let's get started ๐Ÿงต ๐Ÿ‘‡ ๐Ÿ‘‡

Overview of $FB Meta consist of two business lines; (1) Family of Apps and (2) Reality Labs. For FY2021, Family of Apps accounts for ~98% of $FB's total revenue, and Reality Labs only 2%.

Family of Apps Family of Apps consist of Facebook, Instagram, WhatsApp and Messenger. These apps ranked 1st, 3rd, 4th, and 7th as the largest social networks, by monthly active users (MAUs), as of January 2022.

A note is that Youtube (2nd), and TikTok (6th) is more so 'entertainment' platforms, where people mostly watches general content, with little to no content from family/friends. Therefore, IMO, $FB has a monopoly in social media (except China).

This is a big moat, as the network effect is gigantic. However, i would argue that the moat/monopoly only applies to 'pure social media plays', and not entertainment platforms.

This distinction is essential, because at $FB's core, it competes with other apps for a person's time & attention

Anything that can takeaway a person's time (which does not need to be a social media, like Youtube and TikTok), is a competitor to $FB. (More on this later under risks)

How does $FB's Family of Apps make money? Facebook, Instagram, and Messenger make money by selling ads. The more time a user spend on these apps, the more accurate the ads, the more engagements, and the higher the potential revenue.

Whereas WhatsApp still (largely) does not run ads and currently makes money off business users. In other words, WhatsApp is still largely under-monetised.

Since WhatsApp is end-to-end encrypted, $FB cannot see your messages, and use your data to for targeted ads. Therefore, ads monetisation is harder. $FB will need to find other ways to monetise WhatsApp.

But, nonetheless, with over 2 billion MAU, WhatsApp is a huge potential goldmine, waiting to be fully exploited by $FB.

Financials - Family of Apps $FB's Family of Apps' (advertising) revenue has increased by 36% YoY for FY2021, and 20% YoY for Q4 2021.

Although revenue growth is very solid, Family of Apps' user growth has started to stagnate in 2021.

Facebook even has a declining daily active users (QoQ) (albeit very minimal).

Nonetheless, Family of Apps already has so many users (2.8 billion DAP, out of a total of 3.6 billion internet users outside of China). That's ~78% of all internet users!

This means that, inherently, there're less places for $FB's Family of Apps to expand to. Therefore, monetisation per user (through engagement), rather than user growth would be more critical.

Family Average Revenue per Person Average revenue per person has increased by 8.9% YoY in Q4 2021. On an annual basis, it has increased by 22.4%.

Ads impressions delivered across Family of Apps has increased by 10% YoY in 2021. Average price per ad has increased by 24% YoY in 2021.

Interestingly, average revenue per user (for Facebook) in US & Canada, was more than 12 times higher than in Asia-Pacific These figures indicates to me that there's still potential for $FB to increase ads impression, price per ads, and revenue per person.

There are still room to grow, but $FB will need to balance the number of ads vs the user experience. However, the magnitude and speed of the growth is a question, because of various risks...

For example, IOS 14 Privacy Changes Ads revenue growth in the second half of 2021 has been adversely affected by IOS update, which limits $FB's ability to collect data and deploy effective ads. When Ads are less effective -> businesses will be less willing to spend on ads.

The IOS 14 changes are expected to cost $FB ~$10 billion in 2022 (~8.6% of 2021 revenue). Going forward, $FB's success will depend on its ability to maintain (or even increase) their ads effectiveness with less personal data.

Transition to Reels (Short form video) Mark Zuckerberg has said that there has been a shift to short form videos. Financially, this will adversely impact $FB in the short run, as 'reels monetizes at a lower rate than Feed and Stories'

$FB has noted that '[Reels] is already the biggest contributor to engagement growth on Instagram.' (and also one of the biggest contributors on Facebook too). Reels (short form video) will be an increasingly important part to $FB's business, and how much ads revenue $FB make.

As $FB does not disclose a lot of data points on Reels, its hard to pinpoint how this short-form video competition is going to pan out (however, the general consensus is that TikTok is better now). This ongoing battle will be key for all potential $FB investors to watch.

With financials down packed, let's talk about some key risks/questions... 1. Competition 1.5 Younger Generation? 2. Negative sentiment 3. IOS 14 , Potential Google privacy changes 4. Regulation Issues

1. Competition As mentioned earlier, there is a lot of competitors that compete for a user's time and attention. This ranges from short form videos like TikTok, to longer ones like Youtube or Netflix.

The more time that a user spend on these other apps, the less time they can spend on $FB, meaning lower ads revenue.

Below shows the time spent with different 'social media apps'. It's clear that the competition for time and attention is very fierce.

Humans have limited time. People are already spending 147 minutes on social networks, which has stagnated for around 5 years. IMO, it is hard to expect people to spend even more time on social media.

If the total pie is not growing, someone's gain (e.g. TikTok) would mean another's lose (e.g. $FB). Hence, the key question/risk is: Would people start spending less time on $FB and more time on different apps over the long run?

1.5 Younger Generation As shown below, teens and young adults (age 15-25) use Youtube and Instagram more than Facebook. Snapchat is also very popular.

Facebook is no longer 'cool' for young people, as it is becoming their 'parent's platform.' This may be 'correlated' with why average time spent by users of Facebook has also slightly decreased over the past 5 years.

In terms of teens and pre-teens in the US, neither facebook nor instagram ranks in the top 10 based on average daily usage time. Instagram comes in at 21, with usage at ~60 minutes/day.

This means that $FB may be losing even more on both the 'popularity contest' and the 'time spent contest', as these young teens grows up. Whether Instagram will become 'uncool' just like Facebook, will be critical to $FB's long term success.

2. Negative Sentiment A lot of people distrust $FB because of what happened with anti-trust, scandal of Cambridge Analytica, Privacy issues etc.

Some may even think that social media is a drug or an 'addictive waste of time'. Because of this, some even deleted their accounts and claim to live a better life.

This raise the underlying question: Is social media good for us? Your personal answer to this question, and the public's opinion, will be critical to $FB's long term success.

Amid some research, I think that a lot of the negative sentiments are results of $FB seeking for growth more than anything since its inception. $FB did everything they can for growth, now these are the adverse effects that it must deal with.

However, albeit all the negative sentiment, most people still uses $FB's family of apps because there's no other viable alternatives out there (because all our friends/families are on it).

Therefore, for me, the key question is: Will there be an alternative to what $FB is offering (that's way better in privacy, 'ethical' and being liked by everyone) in the future?

Even if so, can this alternative successfully compete with $FB given $FB's dominance?

Personally, i don't think it is possible in the short run, but we can never be certain in the long run (especially if negativity of $FB continues to grow).

3. IOS 14 update & potential google privacy changes As mentioned before, IOS update has hindered $FB's ads effectiveness. It was reported that Google is also planning for similar changes for Android This will further impact $FB's advertising yields.

Although $FB has given its estimate, it is still unclear how big these impact would be. It will be interesting to see how this impact $FB's revenue in the grand scheme of things.

4. Regulation Regulators have been pounding on $FB, as they are one of the biggest and most hated target.

In the future, if regulators requires $FB to have better controls on fake news, they may need to hire more people to check the content. Moreover, more anti-trust hearings would only increase the negative sentiment that people has on $FB.

Family of Apps - Conclusion $FB has a very strong foundation with its Family of Apps. There's a lot of users, but there's also a certain degree of uncertainty for the future...

The low guidance given (expecting 27-29 total revenue, which is 3-11% YoY growth, for 2022 Q1) is a testimony of this.

For myself, I don't see a clear cut answer to whether Family of Apps's revenue would continue to grow rapidly or decline gradually. As outlined before, many things come in play here, and the answer depends on your personal answers to these questions/risks.

Reality Labs $FB (or Mark Zuckerberg if you will) are focusing heavily on trying to bring the Metaverse into life.

Metaverse is a network of virtual worlds, where people can have all kinds of immersive experience through their avatars. The end goal is to enable people doing whatever they want in the Metaverse.

In the words of Mark, it would be the ultimate dream of social media, where you can feel the presence of your friends and families (without a screen).

Facebook's name change into META has shown $FB ambition to expand into the Metaverse. Although personally, i think a part of the reason is also because the name 'Facebook' has a lot of negative sentiments. Why not try a new name signifying a start to a new chapter?

Meta Quest 2 A main way that $FB is striving towards the Metaverse is through the development of VR hardwares, namely, the Meta Quest 2 (formerly known as Oculus Quest 2).

People currently use Meta Quest 2 for gaming, watching Netflix, Youtube, movies, browse the internet etc.

Meta Quest 2 is currently selling for $319USD+. This price is 'very' competitive compare to other major VR headsets.

Moreover, this is an 'appealing' price for general gamers to try VR, considering that the Nintendo switch costs $299, Xbox Series S also $299, and PS5 digital edition $399.

Currently, there're 2 main types of VR headset: (1) A stand-alone VR headset (where you can play VR just by using the headset) (2) PC VR headset (where you need to connect your VR headset to a computer with high graphics performance) Meta Quest 2 is a former kind.

The benefit of Quest 2 being a stand-alone device is conveniency, portability, and most importantly, ACCESSIBILITY to the general public (as PC VR is usually more expensive (can cost more than 1k & a gaming PC may cost 1,500USD+)

However, the downside for standalone is performance. Currently there are still many technical constraints, such as low FPS refresh rates, low resolution, a narrow viewing angle, or motion (virtual reality) sickness. P.S this applies to ALL VR headsets, but more to stand-alone

Due to length considerations, I would not go into the needy greedy of all technical difficulties that VR is facing. But, in a nutshell, VR headsets is still far away from projecting what we see from our eyes, and years (even decade(s)) may be needed, until such level is reach.

Nevertheless, let's examine what the market currently offers... Amongst many reviews, Oculus Quest 2 has consistently ranked #1 as the best 'stand-alone' VR headset. A major reason is that it offers a relatively compelling performance, with a cheap price tag.

Quest 2's popularity Although $FB does not disclose Oculus sales figure, 'it has been estimated that 8.7 million units of Quest 2 has been sold in 2021. That's almost double the total number of VR headsets sold in 2020'.

More impressively, 'Quest 2 was by far the most popular product with 78% share of the combined AR/VR market during 2021'. (Source: International Data Corporation (IDC)

Data provided by Steam suggest that Meta's Quest 2 makes up 46% of VR devices on Steam, and $FB has a 67.3% VR marketshare. These data signifies that currently, $FB is the clear leader in the VR industry.

On top of Quest 2, $FB is currently working on Project Cambria (a more high-end Quest), which is rumoured to support Mixed Reality.

Last but not least, $FB has also been developing its AR glasses, 'Project Nazare'. However, not much details have been disclosed yet.

Alongside hardwares, $FB has also been developing its Metaverse software, the Horizon Worlds. The aim is to make this a VR social platform. However, the platform is still relatively small with 300k monthly users (but growing by a factor of 10x) in February 2022 (theVerge).

Financials - Reality Labs In 2021, Reality Labs have earned a revenue of $2.2billion, up 100% YoY (up 127% from 2019-20). Revenue is growing very fast, but scale is still small (remember that Reality Labs only makes up ~2% of $FB's 2021 revenue).

Spending Gigantically $FB has been spending at least 10 billion in 2021 for all its Reality Labs effort combined. R&D is expected to increase for the next several years.

Whether this is good or bad will hinge on your opinion on whether Meta can make the Metaverse works. Nonetheless, this spending shows $FB and Mark Zuckerberg's ambition to bring the Metaverse into the reality.

Risks/Questions on Reality Labs The overarching question on $FB's metaverse project, is when will the metaverse really becomes the reality? and in what form?

Some technology optimists claim 3-5 years, while other 10 years, and some even longer. The reality is that there's no consensus, and it is just a guessing game (as there are many technological barriers need to be overcome).

Moreover, we probably (or even $FB themselves) don't even know how the Metaverse would ultimately look like. This means that it may take years for $FB to burn cash to support its Reality Labs effort.

Additionally, although Meta currently leads the VR race, there will be more and more competitors coming into this field. (e.g. Apple is going to try really hard) $FB will need to continue executing to provide the best and accessible (cheap) hardware out there.

Conclusion - Reality Labs All in all, the metaverse is a big bet made by $FB. I think the metaverse would be how the future will looked like, but upon research, i just don't know when.

The best case for $FB is that it realises soon (say 3-5, even 10 years), and they get to control the hardware & software (becoming like Apple, being able to charge a high platform fee). That would be the home-run.

The worst case would be $FB is just doing all this too early, similar to working on the internet in the 1980s/90s. The reality would probably be somewhere in between. Only time will tell.

Conclusion - Deep Dive on $FB For me, i wouldn't bet a lot on 'Reality Labs'. I would view a potential $FB investment as buying the social media platforms, with the Metaverse being like a free add-on.

With the current valuation (at the time of writing, a P/E of 16.18), $FB sure looks attractive. However, as mentioned earlier, there're also many risks that if realised, will significantly hinder $FB's core advertising business.

Whether $FB is a good investment, would significantly weigh on whether (1) you think that $FB can maintain its monopoly in social media and compete successfully with TikTok, YouTube and addictive apps for time, and (2) whether you think that Metaverse is close upon us.

END// If you made it here, just want to say a big thank you! I hope you have enjoyed this deep dive, and learn a thing or two more on $FB. If you have enjoyed this thread, please like, RT and follow me @JoshuaTai0427 for more content like this. May God bless you too!

Tagging some people who may be interested in this $FB thread! @frankinvesting @bigbullcap @RihardJarc @BackpackerFI @LiviamCapital @BahamaBen9 @JerryCap @Couch_Investor @MT_Capital1 Would love to hear your thoughts on $FB! Thank you very much!

@borrowed_ideas @QuisitiveInvest @FradeDuarte @daniel_toloko @jablamsk @EquityBrian @UPHOLDINGS @luosheng

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