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$META Investment Update Q424

PREPARED BY: Chris Stanford 

DATE:2/5/24

Investment Thesis: Hold with Strategic Hedging

Since the data privacy scandal, Meta Platforms, Inc. (formerly Facebook) has dominated our portfolio, embodying an unparalleled growth-to-margin ratio among major tech conglomerates. Despite facing substantial scrutiny, our analysis identifies undervalued strategic positioning, particularly in the long-term potential of the metaverse, overshadowed by short-term market overoptimism.

 

Valuation

At a $1 trillion market capitalization, we take a cautious approach to additional investments in Meta. The current valuation reflects a mature appreciation of its immediate growth prospects without adequate discounting for potential regulatory and market risks.We classify Meta as a Hold with recommendations for strategic hedging. Potential investors seeking entry should await a market correction of 20-30% from its peak, given Meta’s historical cyclical valuation patterns.

 

Portfolio Strategy & Valuation

Current Allocation: Meta constitutes a significant 12% of our portfolio. Given the volatile market landscape, we are implementing a hedging strategy through the sale of calls and establishment of a protective collar to mitigate risk.

 

Financial Health

Meta’s revenue growth stands at a modest 15% Y/Y in 2023, reflective of broader market challenges due to elevated interest rates. However, Meta’s robust cash reserves significantly insulate it from the adverse effects of debt market fluctuations, distinguishing it from less financially secure tech peers.

 

Operational Insights

Revenue and Margins: For the trailing 12 months ending 2023, Meta reported a net income of $39 billion on $134 billion in sales, yielding an impressive net margin of 29%. This margin performance is particularly remarkable given the growth stage of the company, outpacing many peers who struggle to achieve such profitability.

 

Market Position and Competition

Despite a slowdown in daily active user growth—a trend not exclusive to Meta but indicative of a broader social media reevaluation—our long-term outlook remains bullish. Meta’s aggressive investment in the metaverse, surpassing nearly all competitors, underscores its commitment to pioneering in this emerging field.

 

Meta’s AI Initiatives: Revolutionizing Technology

Meta Platforms, Inc. is pushing the boundaries of artificial intelligence (AI) with its groundbreaking initiatives. At the forefront is its development of natural language translation models, with “Llama” being a standout. Touted for its superiority over other models like ChatGPT, Llama is an open-source marvel, promising higher quality outputs and drawing top talent to its development.

What sets Llama apart is not just its performance but also its safety. As the safest large language model to date, it excels across various metrics, including math, world knowledge, reading comprehension, and reasoning, outperforming other models in every category. This achievement underscores Meta’s commitment to leading in AI safety and utility.

Investing approximately $30 billion in AI research, Meta contributes significantly to the global AI endeavor. This investment has led to the creation of one of the world’s fastest supercomputers and the development of PyTorch by the Meta AI Research Team (FAIR). PyTorch, initiated in 2016 by Adam Paszke during an internship, has become a cornerstone in AI development, even being utilized in Tesla’s Autopilot system.

Yann LeCun, head of FAIR and a luminary in the field, is known for his pioneering work on Convolutional Networks, essential for vision applications. Meta’s current projects include EMU, which not only generates images from text descriptions but also ventures into video creation for the metaverse, showcasing the vast potential of AI in immersive environments.

 

Conclusion

Meta Platforms, Inc. remains a cornerstone of technological innovation and financial performance within the tech sector. However, in light of its current market valuation and the macroeconomic climate, we recommend a conservative strategy, balancing portfolio exposure with hedging techniques to navigate potential volatility. Our conviction in Meta’s long-term value proposition, particularly its pioneering role in the metaverse, underpins our continued investment thesis.

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