Meta Platforms: Reality Labs, Hardware, And The Artificial Intelligence Story (NASDAQ:FB)

It Looks Like Nothing Has Changed

About six weeks ago I wrote Meta Platforms (NASDAQ:FB) Buying Frenzy. For simplicity, here’s what I said:

Probably more than anything else, I want to emphasize that FB’s price has dropped like a rock, but it’s a cash pumping machine. Maybe it was overvalued above $300, or even when it was above $250. But now, at $210, it’s looking like a fair deal. Maybe a very fair deal, indeed.

That article was mostly a reaction to Reality Labs. Specifically, many investors and analysts have been focusing too much on the $10 billion “loss” there. I think that’s misguided, and I said this about Reality Labs:

… it’s likely to be either neutral or positive for FB in the long term. In the very same breath, I shall dare to say that Reality Labs barely even matters to the profit generating truth. Simply look at the fundamentals again to confirm this for yourself.

In any case, at the time I wrote that article, FB was trading at $211.37 according to Seeking Alpha. And, today as I write this, FB is just above $212. It almost doesn’t seem like anything has changed, but it has. In this article we’re going to look closer at some of those big changes. Further, I discuss how valuation, AI and the core business aren’t getting proper respect.

Many Updates

FB’s price is reflecting a lot of turbulence in the news. Here’s a small sample:

This flood of bad news isn’t too surprising. It’s been rough for growth stocks in general, but FB has been hit particularly hard. In late March and early April, it looked like nearly everything was going wrong. Then, FB reported earnings and FB jumped 13% in afterhours trading. Here’s why:

Revenues rose 7% to $27.9 billion, while analysts (even after a number of downward revisions) had forecast 7.8% growth to $28.2 billion.

Net income declined just 21% vs. expectations for a 24% drop, though.

In operating metrics, daily active users rose 4% to 1.96 billion, topping expectations there, while monthly active users rose 3% to a generally in-line 2.94 billion.

This also helped, for those concerned with the “Metaverse” expenses:

The company sees 2022 total expenses in the range of $87 billion-$92 billion, down from a prior outlook for $90 billion-$95 billion

In any case, all of this wasn’t just some post-market “good vibes” because on April 28th, FB surged ahead by nearly 18%. This was good enough to be FB’s best day ever. Keep in mind, this is juxtaposed by FB’s biggest slump ever, back in early February. In any case, FB swung back hard.

All in all, here’s what it all looks like, over the last six weeks:

In other words, all that additional bad news drove down the price. However, the Q1 earnings generated some good energy into FB. The bad news drove down the price, but the fundamentals, and future outlook, pushed the price back up. Clearly, investors had to stomach a huge wave of volatility.

What’s most interesting is that if you looked at FB on March 21st and then looked again on May 3rd, you would think nothing much changed. You might even think it was a boring stock, and bland company. It’s a bit funny.

Future Catalyst

Again, we come back to Reality Labs. Here’s big news from The Information.

Meta Plots Ambitious VR Release Schedule of Four Headsets by 2024

The Verge provides some color regarding the hardware:

1. Cambria
2. Stinson
3. Cardiff
4. Nazare

And, we must also remember FB’s recent acquisitions, smartwatch, and other current real-world products. In other words, the Metaverse needs hardware, and FB is working very hard to supply that hardware to consumers.

To be very clear, there has also been a huge investment into infrastructure.

Facebook’s 2017 through 2019 investments in data center construction and operations totaled $11.5 billion

And, then this:

Meta spent $5.5 billion on data centers, servers, network infrastructure and office facilities in Q4 2021, as the company continues to expand its infrastructure investments.

Plus, recently this:

Meta, the parent company of Facebook, is investing over $1 billion in building a new data center in Spain to help build the foundation of its metaverse, along with plans to hire 2,000 staff in the region to push development.

The point is that FB is certainly creating software and building out a platform. But it’s definitely not all virtual. It requires serious hardware, which isn’t sexy, so it doesn’t get great coverage.

It’s my thesis that Reality Labs isn’t nearly as important as FB’s artificial intelligence activities. Stated differently, Reality Labs and the Metaverse is really more of a PR activity, but the real meat-and-potatoes is AI, and the related data centers. Not enough investors are aware of this:

Social media conglomerate Meta is the latest tech company to build an “AI supercomputer” — a high-speed computer designed specifically to train machine learning systems. The company says its new AI Research SuperCluster, or RSC, is already among the fastest machines of its type and, when complete in mid-2022, will be the world’s fastest.

“Meta has developed what we believe is the world’s fastest AI supercomputer,” said Meta CEO Mark Zuckerberg in a statement. “We’re calling it RSC for AI Research SuperCluster and it’ll be complete later this year.” [Emphasis: Author]

I’m going to try yet again to emphasize the importance of this. It’s my belief that Reality Labs doesn’t have to do very well at all because it also provides FB with a means to invest in AI.

So, if the Metaverse doesn’t work out, FB is still left with a tremendously powerful infrastructure. Specifically, it’s building out a very robust AI platform, under the cover of what’s popular right now.

Past Catalyst

Putting that future aside, I think looking backwards tells the real story:

The current P/E is around 16. It drops down to around 15 looking out about one year or so. While 2022 isn’t looking great, and growth appears to be slowing, FB is still a cash pumping machine. Putting any hyperbole aside, the raw truth is that FB is extremely profitable.

The growth story is hurt, but not dead. I suspect we’ll see 16-20% growth in 2023 and 2024. That’s good enough for double digit price increases. If history is a guide, FB will rally again. Just look at 2018 and even 2019. There’s always been volatility. It’s par for the course.

These fundamentals are very exciting to me. I’m much more interested in FB’s core business, which is selling ads to eyeballs. That’s super profitable. On the other hand, gambling on an “iPhone Moment” via augmented reality, headsets, and such, is far less exciting to me. (Although, the AI behind it all is very sexy.)

Final Notes

Adding it all up, I think FB’s real value proposition is simple:

• Historically cheap valuation
• Incredible user penetration
• Artificial intelligence solutions

Most of the rest of the story with FB is marketing, hype, and hope. That’s necessary to keep energy high, but it’s not the reason to invest. FB trading at P/E of 16 is far more compelling. Buying a high quality, high profit, and otherwise undervalued company is the real magic.

Once again, I’m bullish on FB and expect a bright future. So, yes, FB is a buy.