Facebook Q3 2021 – Talking cash

Facebook puts its money where its mouth is.

• Users are still not deserting Facebook despite all of the bad press but the real story here is that Facebook is going to invest at least $10bn a year in building the Metaverse.
• Facebook reported reasonable results but there are significant headwinds that will take some time to deal with which will slow short to medium term revenue performance.
• Q3 2021 revenues / EPS were $29bn / $3.22 compared to estimates of $29.5bn / $3.17.
• Guidance was a little light with Q3 2021 revenues expected to be $31.5bn – $34.0bn ($32.75bn) compared to consensus at $34.8bn caused by the same factors that impacted Snap last week.
• Critically, these issues are affecting Facebook less than Snap (as I thought they might) given how important Facebook is in any digital marketing campaign.
• Furthermore, user numbers and engagement continue to grow clearly pointing to the fact that while legislators and the media hold one view on Facebook, users either don’t care or hold the opposite view.
• I continue to believe that it will not be until we see users vote with their feet and stop using the platform, that Facebook will be in any real trouble.
• Furthermore, I am skeptical of the much-espoused view that Facebook is a giant evil empire that must be dismantled at all costs partly because those that are calling for its dismantling (the media) stand to benefit the most should this come to pass.
• Consequently, the outlook is that Facebook is going to grow more slowly in the short to medium term but margins will be high which will be required in order to enable it to pay for the massive investments it is making in the Metaverse.
• From Q4 2021, Facebook is changing its reporting structure and will break out Facebook Reality Labs (FRL) as a separate business unit.
• At the same time, Facebook has prepared the market for some serious red ink as investments are expected to be around $10bn in this division for the full year 2021 while revenues will be closer to $3bn.
• This implies that for the full year, this division will report EBIT losses of $7bn (-233%) or greater which may come as a shock to the market.
• The scale of these investments, which are set to continue, dwarfs anything that is being invested by anyone else and demonstrates how serious Facebook is about where it thinks its future lies.
• Investments at this scale make it almost impossible for anyone outside of Google, Apple, Amazon. Microsoft etc. to compete and leads me to think that Facebook is going for the whole segment.
• Some players are focused on the hardware (HTC) or the software (Roblox) but Facebook clearly intends for its version of the Metaverse to be the place where users spend their digital lives in the future.
• Furthermore, I think that this is going to take a very long time as it was at least 10 years from inception before smartphones really came into the mass market.
• Fortunes will be won and lost along the way, but the time when Digital Life is lived in the Metaverse is a long way off.
• Facebook has a big advantage in that it has billions of engaged users to sell this to, but at the same time, it is currently dependent on the ecosystems of Apple and Google.
• The size of this investment and those that will follow implies that Facebook intends to rid itself of this dependency by leveraging the Oculus platform going forward.
• I continue to think that Facebook has a good a shot at this as anyone else but only time will tell how well it fares.
• Facebook’s valuation at 21x 2021 PER and 18x 2022 PER is not as challenging as its peers, but I suspect that the negative press is going to weigh on the shares in the short-term meaning that it could get cheaper still.
• I think that the time to buy is still a little way out yet.