Metaplatforms: Reality Labs, Hardware, and the History of Artificial Intelligence (NASDAQ: FB)

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It seems nothing has changed

About six weeks ago I wrote Meta Platforms (NASDAQ:Facebook) Buying Frenzy. To simplify, here is what I said:

Probably more than anything else I want to point out that FB price has dropped like a rock, but that’s a money pumping machine. Perhaps it was overvalued above $300, or even above $250. But now, at $210, it looks like a bargain. Perhaps a very fair deal, indeed.

This article was primarily a reaction to Reality Labs. Specifically, many investors and analysts have focused too much on the “loss” of $10 billion. I think that’s misguided, and I said this about Reality Labs:

it is likely to be neutral or positive for FB in the long run. In the same breath, I will dare to say that Reality Labs barely counts for profit-generating truth. Just review the fundamentals to make sure for yourself.

Anyway, at the time I wrote this article, FB was trading at $211.37 according to Seeking Alpha. And, today, as I write this, FB is just above $212. It almost seems like nothing has changed, but it has. In this article, we’ll take a closer look at some of these big changes. Additionally, I discuss how evaluation, AI, and core business are not respected enough.

Many updates

FB price reflects a lot of turmoil in the news. Here is a small sample:

This flood of bad news is not too surprising. It was difficult for growth stocks in general, but FB was particularly hard hit. At the end of March and beginning of April, it seemed that almost everything was going wrong. Then FB declared his income and FB jumped 13% in after-hours trading. Here’s why:

Revenue rose 7% to $27.9 billion, while analysts (even after a number of downgrades) had forecast growth of 7.8% to $28.2 billion.

However, net profit fell only 21% compared to expectations of a 24% drop.

In operating metrics, daily active users grew 4% to 1.96 billion, beating expectations there, while monthly active users grew 3% to 2.94 billion generally online .

It also helpedfor those affected by “Metaverse” expenses:

The company forecasts total spending for 2022 of between $87 billion and $92 billion, down from earlier guidance of $90 billion to $95 billion.

In any case, all this was not only post-marketing “good vibes” because on April 28, FB jumped almost 18%. It was good enough to be FB Best day of my life. Keep in mind that this is juxtaposed by FB’s Biggest Crisis Ever, back in early February. In any case, FB backed down hard.

Overall, here’s what it all looks like, over the past six weeks:

Data by Y-Charts

In other words, all that extra bad news drove the price down. However, Q1 earnings generated good energy for FB. The bad news drove the price down, but the fundamentals and future outlook pushed the price back up. Clearly, investors had to endure a huge wave of volatility.

What’s most interesting is that if you watched FB on March 21st and then watched again on May 3rd, you’d think nothing had really changed. You might even think it was boring stock and bland business. It’s kinda funny.

Future Catalyst

Again, we come back to Reality Labs. Here is great news from information.

Meta Plots Ambitious VR Release Schedule of Four Headsets by 2024

The edge provides a bit of color regarding the material:

  1. cambria
  2. Stinson
  3. Cardiff
  4. Nazare

And, we must also remember the FBs recent acquisitions, smart watch, and other current real-world products. In other words, the Metaverse needs hardware, and FB works very hard to deliver that hardware to consumers.

To be very clear, there has also been a huge investment in Infrastructure.

Facebook’s investment from 2017 to 2019 in building and operating data centers totaled $11.5 billion

And, then this:

Meta spent $5.5 billion on data centers, servers, network infrastructure and office facilities in Q4 2021 as the company continues to expand its infrastructure investments.

More, recently this:

Meta, Facebook’s parent company, is investing more than $1 billion to build a new data center in Spain to help lay the foundation for its metaverse, along with plans to hire 2,000 employees in the region. to drive development.

The thing is, FB certainly creates software and builds a platform. But certainly not everything is virtual. It requires serious material, which isn’t sexy, so it doesn’t get great coverage.

My thesis is that Reality Labs is not as big as FB’s AI business. In other words, Reality Labs and the Metaverse is really more of a PR thing, but the real meat and potatoes is AI and the associated data centers. Not enough investors aware of that:

Social media conglomerate Meta is the latest tech company to build an “AI supercomputer” – a high-speed computer designed specifically to train machine learning systems. The company says its new AI Research SuperCluster, or RSC, is already among the fastest machines of its kind and, when completed in mid-2022, will be the fastest in the world.

“Meta has developed what we believe is the world’s fastest AI supercomputer,” Meta CEO Mark Zuckerberg said in a statement. “We call it RSC for AI Research SuperCluster and it will be completed later this year.” [Emphasis: Author]

I will try once again to emphasize its importance. I think Reality Labs doesn’t need to do very well at all because it also provides FB with a way to invest in AI.

So if the Metaverse doesn’t work, FB still ends up with an extremely powerful infrastructure. Specifically, it builds a very robust AI platform, under the guise of what’s popular right now.

past catalyst

Putting that future aside, I think looking back tells the real story:

Fundamental evaluation of meta-platforms

Fundamental evaluation of meta-platforms (FAST Charts)

The current P/E is around 16. It drops to around 15 in about a year. Although 2022 is not looking very good and growth seems to be slowing down, FB is still a money pumping machine. Putting all hyperbole aside, the raw truth is that FB is extremely profitable.

The growth story is hurt, but not dead. I suspect we’ll see 16-20% growth in 2023 and 2024. That’s enough for double-digit price increases. If history is any guide, FB will rally again. Look at 2018 and even 2019. There has always been volatility. This is normal for the course.

These fundamentals fascinate me. I’m much more interested in the core business of FB, which sells advertisements to eyeballs. It’s super profitable. On the other hand, betting on a “Instant iPhone” via augmented reality, headsets, etc., is much less exciting to me. (Although the AI ​​behind it all is very sexy.)

Final remarks

Adding it all up, I think FB’s true value proposition is simple:

  • Historically cheap valuation
  • Incredible user penetration
  • Artificial intelligence solutions

Most of the rest of the story with FB is marketing, hype, and hope. It is necessary to maintain high energy, but it is not the reason to invest. FB trading at a P/E of 16 is much more compelling. Buying a high-quality, high-profit, otherwise undervalued business is the real magic.

Again, I’m bullish on FB and expecting a bright future. Then yes, FB is a purchase.

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