Meta (FB) Delivered a 383% Gain — Updated Recommendation

Intro:

On March 18th, 2018, we issued a buy recommendation for META (then FB) at a price of $153. If an investor bought FB on that date and still held it today, he/she would have a roughly 383% total return coupled with an annual CAGR of about 23.66%. During the same timeframe, the S&P 500 returned approximately 135%; therefore, this investment almost tripled the overall market return.

Note: This is an update to our previous article. This is not an in depth analysis but rather a summary as to why after seven years, we believe now might be a good time to lock in some gains.

Reasoning:

Similar to our discussions in October 2022 (when META’s share price was <$100), the March 2018 original recommendation came at a time when we believed META’s share price was being irrationally suppressed. It is now our belief investors have priced in much of META’s potential. According to finviz.com, META currently sports:

• Forward P/E: 24.75
• Dividend: 0.24%
• EPS Growth Past 5 Years: 29.99%
• EPS Growth Past 3 Years: 20.10%
• Sales Growth Past 5 Years: 18.40%
• Sales Growth Past 3 Years: 11.73%
• ROE: 40.65%

META has had a consistent decline in both sales and EPS growth over the last few years (e.g. three vs. five year comparison above). This is expected from any maturing company of this size; however, it is still worth noting, the company still sports a very good ROE of 40%+; consequently, we continue to believe this company still has a solid future. That being said, there comes a point when market price creeps closer towards an investor’s price target; this in turn begins to eat away at the investment’s margin of safety. It is for that reason we have issued the following update for anyone who bought META (formerly FB) in March 2018 or October 2022. This may be a good time to consider locking in some of those amazing gains.

Our current price target for the stock is still $907 with a margin of safety of 18.5%. Even though we believe this company still has potential to appreciate, we will be downgrading our current rating from a BUY to a HOLD. Below are a few brief considerations which led to our conclusion:

Our decision to downgrade META is largely based on valuation, capital allocation, and opportunity cost.

• Valuation looks stretched even when considering the margin of safety from above. It is my belief if a market correction ensues, stocks which are heavily invested in AI will get hit hard. I will point out, unlike many AI companies, META has significant cashflows to weather storms.
• Heavy spending on AI talent and infrastructure ($72 billion in 2025) is boosting META’s capabilities but also compressing margins. The spending spree Zuck has been on trying to recruit the best AI talent in the world, is either going to be a hit or miss. There is so much competition in AI right now, I am not certain sending several $100 million offers to recruit individual employees will incentivize them much beyond earning that first $100 million (I could be wrong and I am not referring to everyone). But my hypothesis is: The employees who are leaving their current projects/teams for these large contracts from competitors, are more likely motivated by the money than the work they are currently doing (could you blame them); therefore, once they earn this amount of money (we aren’t talking $1-2 million, this is “my kids and I will never need to work again” type money), what is going to stop them from losing their determination/passion (we see this with sports figures all the time) and/or leaving to start their own businesses; they will obviously have plenty of startup capital. Noncompete agreements only stretch so far.
• Regulatory overhang remains a threat especially with the rapid development in AI (FTC, EU, antitrust, etc.). We all saw how much scrutiny META faced during the early days of social media. I expect similar scrutiny as AI continues to develop.
• Opportunity costs from holding this investment. In my opinion, there are safer alternatives in discounted sectors (e.g. small-cap, healthcare, etc.).

Summary

I believe this may be a great time to lock in those 300%+ gains and redeploy capital into more asymmetric opportunities. Meta has served investors well, but our focus remains forward-looking; and right now, I believe better risk/reward opportunities are available.

This article is for informational purposes only and does not constitute financial or investment advice. The views expressed are those of the contributor and are based on publicly available information and personal analysis.

The contributor no longer holds any material positions in META and has no current plans to reacquire (subject to change). This is solely disclosed for transparency.

No representation is made as to the accuracy or completeness of the information provided. Readers are solely responsible for verifying any facts and should consult a licensed financial advisor before making investment decisions. Past performance is not indicative of future results.