Earnings season has been brutal for many investors, especially for those who own technology and internet stocks. Even though we are less than three months into 2022, many high-growth stocks are down 30% or more already this year, which can be tough to stomach. Meta Platforms (META -1.12%), the parent company of Facebook, Instagram, WhatsApp, and Oculus, is one of these stocks. Shares are down 40% year to date after the company put out poor guidance for the first quarter and has been hit by the broad market sell-off to start 2022.
If you're thinking of buying the dip on Meta Platforms stock, it might be smart to model out and estimate how big this business could be in a few years. Where will Meta Platforms be three years from now? Let's take a look.
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Solid earnings, but poor guidance
On Feb. 2, Meta Platforms put out its earnings for the last three months of 2021. Revenue grew 20% year over year to $33.7 billion in the quarter, and earnings per share (EPS) was $3.67, slightly down from the year-ago period. Both of these numbers were right around analyst expectations.
User numbers came in a bit weak compared with expectations. Total daily active users (DAUs) were 1.93 billion versus 1.95 billion expected, and monthly active users (MAUs) were 2.91 billion versus 2.95 billion expected. However, the company made up for this user shortfall with average revenue per user (ARPU) of $11.57, which was better than the $11.38 analyst predictions.
All these fourth-quarter numbers were fine, but the big surprise was Meta's guidance for the first quarter of 2022. Revenue for Q1 is expected to be between $27 billion and $29 billion, which was much less than the $30.1 billion analysts were expecting. Given this disappointment, Meta's stock plunged 20% in the days following the report, accounting for a lot of the stock price decline.
Family of apps and reality labs
When it changed its name from Facebook to Meta Platforms, management decided to switch up how the company reported its financials. It now has two segments: "family of apps" (Facebook, WhatsApp, Instagram) and "reality labs" (the metaverse and virtual reality division). The family of apps division, though marred by controversy, has continued to grow both revenue and profits over the past few years. From 2019 to 2021, revenue for the segment grew from $70 billion to $115.7 billion, and operating income grew from $28.5 billion to $56.9 billion.
With a market cap of $556 billion, that gives Meta's stock a dirt cheap price-to-operating-income (P/OI) of 9.8 based on its family of apps division. So why are investors discounting family of apps so much when the social media apps have continued to grow and increase their profitability?
The uncertainty comes from Meta's other segment, reality labs, which houses Oculus and its virtual/augmented reality research divisions. The division burned $10.2 billion in 2021, which is right around the annual burn rate Mark Zuckerberg said the division will run at for the foreseeable future. With only $2.2 billion in 2021 revenue (a small amount for a company of this size), there is still a long way for this division to grow and a lot of uncertainty over whether these investments will ever turn into a viable business. Given this uncertainty and how much money the division is expected to lose, it is understandable that investors are nervous about these moves from Meta Platforms.
Returning capital to shareholders
The good thing about this business, as compared to practically any other that is burning $10 billion a year on a venture-style bet, is that it is still able to generate tons of cash for shareholders. In 2021, Meta Platforms generated $39 billion in free cash flow, up from $23.6 billion in 2020, which is highly impressive given how much money the reality labs division is losing.
With so much cash coming in, Meta Platforms has started returning some to shareholders in the form of share repurchases. Meta's share count has come down by 5.9% in the last five years, with the majority of that drop coming in the last year or so. For reference, management spent $19 billion on buybacks just in Q4 of 2021. At its current market cap of $556 billion, Meta should be able to reduce its share count by around 7% in 2022 if it spends all of its 2021 free cash flow on share repurchases.
FB Shares Outstanding data by YCharts
So where will Meta Platforms be in three years?
Given the differences between Meta's two operating segments, it is hard to evaluate where this business will be at the start of 2025. It is likely the reality labs division will still be burning $10 billion a year, as that is Zuckerberg's stated plan right now. Family of apps is harder to predict because of the nature of the social media industry. However, if we assume revenue will grow at 10% a year (which would be a big slowdown from its historical growth rate) over the next three years with stable operating margins, Meta's family of apps division will be generating around $76 billion in annual operating income three years from now.
Subtract $10 billion in reality labs losses and Meta Platforms' consolidated operating income could be $66 billion in 2024. At its current market cap of $556 billion (which doesn't include any benefits from buybacks), that would give the stock a P/OI of 8.4. Unless something drastic happens with the overall stock market from now until then, I think there is a chance Meta Platforms stock could be significantly higher three years from now.
