Meta’s Network Effect Is Sound; Shares Undervalued

While Meta FB posted mixed first-quarter results, what stood out was the increase in both monthly and daily active users, which demonstrates that the firm’s strong network effect remains intact. We are pleased that while Meta continues to focus on metaverse opportunities in the long run, it is also increasing its efforts and investments in its very profitable advertising business to overcome obstacles created by Apple and position itself to benefit from the growing short-form video trend. With lower-than-expected first-quarter revenue and Meta’s revenue guidance for the current quarter, we have reduced our projections a bit, which lowered our fair value estimate only 4% to $384. We view this wide-moat name attractive as it is trading at less than half our fair value estimate.

Meta’s ongoing strategy to monetize Reels, which currently has lower ad prices, was partially responsible for the revenue miss, as it drove its user monetization down slightly from last year. However, we remain confident that over time Meta will increase Reels monetization by attracting more advertisers with its large user base that is spending more time consuming content on Reels. While we expect Meta to keep facing pressure from policy changes at Apple, competition from the likes of TikTok, and current geopolitical and economic factors, we foresee the successful monetization of Reels and the firm’s investments in ad effectiveness and measurement enhancements will return it to double-digit top-line growth in the second half of 2022 and beyond.

On the user front, the family monthly active people count increased to 3.64 billion from 3.59 billion in the previous quarter and 3.45 billion last year. Daily user count was 2.87 billion, up from 2.72 billion and 2.82 billion in last year’s fourth and first quarters, respectively. Facebook specific daily and monthly user counts increased sequentially and from last year; however, the number of European users declined as Russia has blocked Facebook users.

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