Facebook (Meta) in Year 2030
Potential declining Free Cash Flow = lower valuation.
Facebook’s (Meta?) fundamental shift in direction is something investors need to be cautious about. It is an “investment thesis change”. The kind of fundamental shift in strategy that makes me question everything about the company.
Luckily, one can start building a fairly simple model to see potential outcomes from this and start projecting the outcome in Year 2030.
We’ll begin by looking at $FB numbers from Year 2015-Year 2021 :
Annual Rev Growth : Starts at 54% (2016) and drops to 30% (2021)
Gross Margin : Starts at 84% (2015) and drops to 80% (2021)
Free Cash Flow Margin : Starts at 43% (2015) and drops to 31% (2021)
Market Cap : Starts at $293b (2015) and increases to $928b (2021)
Market Cap / FCF multiple : Starts at 37x (2015) and drops to 25x (2021)
Market Cap / Gross Margin multiple : 10x
Facebook is a large and mature business and the numbers are starting to reflect that maturity. Growth is decelerating, Gross Margins are declining and multiples are contracting.
However, my investment thesis in Facebook is based on the following :
Annual Rev Growth : 20% (2022 & 2023), 15% (2024-2027), 10% (2028-2030)
Gross Margin : 80% (2022) and drops to 65% (2030)
Free Cash Flow Margin : 30% (2022) and drops to 25% (2030)
Market Cap / FCF Multiple in 2030 : 15x
Market Cap / Gross Multiple : 10x
Valuation in Year 2030 under my current thesis :
Market Cap (FCF Multiple 15x) : $1.412T (1.9x / 7% IRR)
Market Cap (Gross Margin multiple 10x) : $2.44T (3.3x return / 13% IRR)
The returns above bake in some sandbagged numbers. Namely, an immediate deceleration in Facebook’s growth from 30% to 20% within 1 year and a continued deceleration in the subsequent 9 years to 10%.
One can argue that these numbers are fairly conservative in an era of expanding advertising spend on social media and under monetisation of $FB users outside North America and Europe.
I also did not consider share buy backs. $FB is planning to spend $50b (5% of current market cap) on buybacks.
Taking all of these into consideration, one can make an argument that $FB has a high probability of giving investors IRRs exceeding 10% at today’s price for the next 10 years. This is why I called Facebook a good business.
The Meta Wrench - Eats Free Cash Flow with possible nothing to show for it.
$FB’s announcement to spend $10b a year with more to come is problematic. It’s problematic because there is no clear path to free cash flow from that massive capex.
I do believe in a future where immersive virtual worlds are so good that many people will choose to spend more time in them. It’s a bit like TikTok. I don’t use it and never understood the appeal. But millions of people do. If $FB pulls off a new platform that generates meaningful value, this capex spend will look cheap.
However, this is speculation.
Let’s assume the extra Capex for the metaverse bet comes directly from $FB’s existing cash flow and nothing comes of it by year 2030. Here’s how the numbers could pan out :
Additional Capex for Metaverse bet : Starts at $10b (2022) and grows to $25b (2030) - roughly 10% of revenue today, but declines to 6% of revenue in 2030.
Capex generates no additional free cash flow
$FB free cash flow in Year 2030 : $69b (after removing 25b in Capex for Meta)
$FB market cap in 2030 (15x FCF multiple) : $1.035T (41% gain / 3.5% IRR)
The thesis fundamentally changes from a solid outperformance to a severe underperformance.
What I am doing in the short term.
I will not be adding any more to my current $FB holdings unless there is a massive dip that juices the IRR for the above scenario. Facebook is currently 8.4% of my family’s portfolio cost basis and I am happy with the current allocation.
My initial plan was to build it to 15% of portfolio cost basis for a high probability of 10-15% IRR. However, with uncertain free cash flow yield in future, I cannot see those IRRs without an expansion in FCF margin, and FCF multiples in 2030.
If $FB continue growing at 15% and FCF margin maintains at 30%, after a $25b capex, $FB will have $102b in Free Cash Flow. Assigning a 15x multiple on that will yield a 1.5T market cap (8% IRR). It’s still not juicy enough for me personally.
Things can absolutely change if that Capex results in re-acclerating growth in revenue. If that capex for Meta yields growth rates of 20% until Year 2030, assuming a 25% FCF margin, we can expect a 2.2T market cap (12% IRR). There could be more if FCF margins expand to 30% and the narrative around Facebook changes. The market could give $FB a larger 20x or 25x FCF multiple.
However, I prefer not to indulge in such speculation with mature businesses like Facebook.
I do not plan on selling $FB. I’d be paid a small 3.5% IRR for the option of owning a (potentially) ground breaking Metaverse company with upside should the new business take off.
Legal Disclaimer : Please note that the author of this substack is not a certified financial advisor. All content on this author’s substack should not be taken as investment advice. These are merely opinions. The author could very well be wrong.