Purpose: when advertising rises

Action Meta-platforms (“Broad Moat”) has fallen 38% since the beginning of the year due to increased competition and the introduction of data privacy policies.

This slowed revenue growth and put pressure on margins.

However, we believe that the market ignores the high probability that the double-digit increase in advertising revenue will return due to the competitiveness of the platform, which has helped increase the number of users and involvement in its programs.

With 3.6 billion users combined with investment in new innovative advertising options for advertisers, we expect that the wider use of short video advertising, which Meta called Reels, will help the company compete more effectively with players such as TikTok.

The company is also investing in improving its tools for measuring the effectiveness of advertising, which, in our opinion, will increase the use of less detailed data, as apple (Narrow Moat) and possibly different governments continue to restrict access to data to protect privacy.

These efforts are expected to increase the current costs of advertisers and attract new ones by monetizing users and increasing revenue from the Meta family of programs (Facebook, Messenger, Instagram and WhatsApp).

With a return to stable revenue growth, we expect a return to an increase in margins from 2023.

We expect Meta to continue to generate strong free cash flow, as the money received from the family of digital advertising programs more than offsets the money invested in the coming years to grow and build a business around Metaverse.

Key points to keep in mind

  • Network effect The goal is to protect the user base and the level of involvement.
  • Although user growth is likely to slow below 6% annually as meta-applications significantly saturate the market, increasing engagement should increase user monetization at a steady pace.
  • Short videos (“Coils”) should provide a strong response against TikTok and improve monetization, as advertisers will be happy with this offer. The success of Meta with Stories, which directly competes with Remove (“No Moat”) demonstrates its ability to copy functionality on its dominant platforms.
  • Apple’s data policy will have a long-term impact on Meta and other platforms, but Meta’s investment in measuring advertising and better targeting will partially mitigate that impact.
  • With Reels’ revenue growth and improved tools for measuring advertising revenue growth, it will accelerate, leading to higher margins.
  • The market ignores Meta’s potential to return its advertising business to double-digit growth.
  • Meta shares, trading at about half of our fair value estimate, are attractive.

The full study is available on the research platform Book for speechesa subsidiary of Morningstar.

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