Chantal Marx & Nick Crail
Facebook was founded by current CEO Mark Zuckerberg, along with fellow students at Harvard University in 2004. Initially, the website was exclusively for Harvard students but soon expanded to other universities, and eventually became available to anyone with an email address. In 2012, the company went public via an IPO that valued the company at $100 billion. In the same year, it acquired Instagram for $1 billion and in 2014, it bought WhatsApp for $19 billion and Oculus VR for $2.3 billion. The most recent notable acquisition is that of chatbot specialist startup Kustomer in 2022 for $1 billion.
The company boasts approximately 4 billion monthly users and serves millions of advertisers globally across its family of apps.
Most of the company's revenue is generated in the US and Canada, followed by Europe and the Asia Pacific region. The rest of the world accounted for 12% of revenue in FY23.
Digital advertising dominance
Advertising accounted for 98.3% of Meta's revenue in 3Q24 and is set to remain the dominating contributor to the top line going forward.
Per Statista, digital advertising spending grew at a compounded annual growth rate (CAGR) of approximately 17% per year from 2017 through 2023 and is projected to grow at a CAGR of 7.2% per year through 2028. The main driver of this growth will be economic growth, followed by increasing internet penetration, increased digital media consumption, and to a lesser extent, inflation and a further shift away from traditional media (most of this shift has already taken place).
Meta is the second largest digital advertiser globally with a market share of approximately 18% in FY23, trailing Alphabet (Google and YouTube) at 39% and ahead of Amazon at 7% and TikTok at 3%. Some shifts in these share values are anticipated, with Amazon and TikTok expected to gain but unlikely to unseat Meta as the second-largest player in this space over the next five years.
Meta's competitive advantage in digital advertising stems from its "global network effects", rooted in its ability to connect people as their network size is unmatched. The user base spans across geographies and age cohorts acting as a product and a driver of the network effect: each new user increases the network's value to users by contributing content, engaging with others, and increasing the platforms' overall utility.
Improving ad efficacy through AI
Ad pricing has continued to improve for the larger digital ad players being Meta, Alphabet, and Amazon.com who have all improved their "ad stacks" using generative AI. Ad stacks are ad tech complexes that involve media-buying, media-selling, and data activation solutions under one roof.
Meta's AI recommendation engine has started delivering engagement gains both on Instagram and Facebook. It has refined its ad insertion algorithms to consider a user's sequence of actions before/after seeing an ad and this has led to higher conversion rates.
Also helping conversion rates has been an increased adoption of MetaAI automation and creative tools. The automation tools help determine the optimal campaign setup across audience, budget, placement, and creative and conversion destination. The creative tools allow advertisers to develop a variety of advertising creatives based on a variety of motivations to appeal to different audiences which they can also diversify by format.
The numbers have been very promising for advertisers using both tools - as examples, automated shopping campaigns have been shown to achieve a 17% improvement in cost per conversion.
Optionality for growth via Reality Labs, Threads and Whatsapp
Despite mounting losses in Reality Labs, the segment still dominates the virtual and augmented reality headset market. Losses are anticipated to peak next year as more widely adopted reality applications, such as smart glasses and augmented reality (AR), begin to gain momentum.
Threads has recently seen decent adoption with 275 million monthly active users at last count, up from 200 million in the third quarter and 100 million at the end of its first quarter after launch (being 3Q23).
Finally, WhatsApp is the most used messaging app globally with close to 3 billion users. Fairly recent monetisation includes websites paying for direct messaging (via a toggle) and corporates buying a direct communication with clients via the app - either through messaging or setting up channels to promote product or share information.
Investment case summary
Risks
Outlook & valuation
