The Coming Dangers to Facebook, Virtual Reality, and Ads ($META Stock)

should you invest in Facebook that's

what we're going to review in this video

and I'm going to give you some potential

other options as well if you're looking

for some Pure Play advertising stocks

and one of them is killing it today in

the markets let's see if it continues

and see what we think about ads just

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love to see there email us if you have

questions at kevin.com thanks so much

now we're going to talk about meta

advertising Snapchat Pinterest trade

desk and good advertising as well as

Google potentially be a massive sector

that is missing from your portfolio

let's do some fundamental analysis and

understand a little bit of what's going

on in the advertising sector look the

first thing that we've got to start with

is we we've got to talk about Facebook

because obviously their earnings were

such that folks got very optimistic with

a higher Revenue beat than expected Mark

Zuckerberg talks about making the

company more efficient there was a lot

of talk in the earnings call about being

tired of having managers managing

managers Facebook laid off about 11 000

people and the idea for Facebook is

let's try to make the company a little

bit flatter less sort of hierarchical

which is very expensive because every

payroll is expensive if you are an

employee whatever your salary is

remember that the company probably has

to pay about 50 more just to keep you

around so if you make 100K probably cost

the company 150 000 HR payroll taxes

workers comp supplies mistakes days off

paid days off vacation sick time you

name it okay there are a lot of costs

that come along with that that but

that's okay but it makes sense if you

can cut out some middle level management

and keep the company more efficient

there's a great option opportunity to

reduce your cash burm especially since

meta is well continues to expect to

spend a lot of money on uh reality Labs

which is really their money losing

division for the metaverse and the

reason Facebook is really doubling down

on the idea of the metaverse is because

they believe the metaverse my opinion is

the next Frontier for social media

advertising and they want to make sure

they get the grip on the metaverse so

that way when people start actually

spending more time in the metaverse

maybe the time they spend now on YouTube

they spend in the metaverse Facebook

could be the one that has a dominant

advertising platform so this year at

least they're calling 2023 the year of

efficiency simplifying their

organizational structure and really

trying to get back to a return to growth

they're increasing their share BuyBacks

they're lowering their expenses and

really well digital advertising demand

and pricing is still weak they're

starting to see some green shoots along

with an improvement in online e-commerce

now that was actually surprising to me

so you're seeing e-commerce see a little

bit of a pop in advertising and you're

saving seeing travel and health spending

substantially up the sectors that are

down in advertising or financial

services and Technology with average

price paid per ad down about 22 however

they did allude to more growth in the

potential advertising sector for short

form content such as Facebook and

Instagram reels which YouTube just

yesterday turned on monetization for

short form reels uh but well sure

YouTube shorts basically a 60 second or

less content they just turned on

monetization for that so we'll see uh

what that ended up ends up doing to the

advertising sector but there's a lot of

focus on Facebook Snapchat uh trade desk

and Google for advertising Google does

end up reporting today uh Pinterest is

another one that's moving on this they

just announced they're expecting to cut

150 jobs you've had similar cuts at

Google Google just had five Executives

from the doubleclick ad business which

some say holds about 90 market share and

sort of the brokering sector for

brokering website ads five Executives

just apparently lost their jobs there

along with potentially hundreds of other

individuals working there uh Google has

about a 25 market share of All Digital

advertising and then in the other 75

you've got companies advertising like

obviously Facebook uh then you've got uh

YouTube's obviously part of Google but

then you've got a trade desk which is

your connected TV Advertiser and so on

uh now what's fascinating about the

advertising sector is you've kind of got

these hidden misses you've got Facebook

seemingly potentially excited at least

their stocks excited seeing some green

shoots in advertising again but you're

still getting a hit from reality labs

and cash expenses to where they're

trying to refine their business to make

it more effective unfortunately you had

Snapchat that reported and they missed

bigly and they that was potentially

because you've got 90 percent of snaps

user base being under 25 years old

leading to potentially a less uh dare I

say advertising Revenue than some of the

other platforms after all snap generates

more Impressions per dollar than Google

or meta but that's potentially because

the the users are just a lower value

Target so advertisers also tend to have

limited data using Snapchat on how their

ad is doing and this is leading a lot of

folks to focus on different platforms

and kind of brings me to uh wanting to

look at two things one I want to look at

the fundamentals for Facebook and number

two we I want to understand trade desk

and their uid2 platform a little bit

more first though let's look at meta's

fundamentals for a moment so here's meta

fundamentally and we'll go ahead and

look at some of these numbers together

so Facebook's Revenue declined for the

third quarter in a row year over year so

you're really in a revenue recession at

Facebook right their revenue is down to

32.1 billion dollars versus 33.6 at the

same time last year that's about a four

and a half percent decline in Revenue at

the same time as their revenue is

declining their costs are going up

substantially while their revenue

declined four percent their costs of

goods sold which actually doesn't

include research and development

increased 31 so even though the stock is

rallying you do have some problems

Revenue declining four percent and costs

of goods sold up 31 r d also exploded

9.7 billion dollars of r d expense

compared to about seven billion dollars

of r d expense last year puts you in

about a 39 percentage Point increase in

research and development their marketing

and sales and GNA stayed roughly flat to

slightly negative uh and really what you

had was a a cost structure that just

became a bit more well costly so their

net income fell their net income sitting

at about 4.6 billion dollars down from

10 billion dollars last year so you've

got about half as much income coming

into Facebook as you did last year and

if we go to a cash flow statement for

the company we're not terribly worried

about the company's assets and their

balance sheet and companies well

capitalized but if we look at the cash

flow statement we can see do they

actually have cash flow and if you take

their net income and you look at their

operating cash they do they've got

operating cash from about 14.5 billion

dollars in a net cash provided by

operating activities hold on let me just

make sure quickly that we've got this

aligned properly here we've got net

income of 4.6 we've got depreciation

share based comp uh accounts receivable

accounts payable we've got other

liabilities we've got net cash okay yeah

exactly okay then here we have purchases

of property and Equipment nine billion

dollars this gives you a free cash flow

estimate free cash flow would be the

difference between cash flow from

operating and cash flow or cash expense

for Investments so if we look at 14.5

minus nine you're sitting at about 5.5

billion dollars of free cash flow it's

not bad so they're still making

substantial amounts of money and part of

this is because they're adding back in

about 2.3 billion dollars in

depreciation uh they're adding back in

three billion dollars of share-based

compensation so you really have a

company that's not short for cash

they've got plenty of cash 5.5 billion

dollars of cash in just the three months

ending uh 2022 that's not bad it's

actually very impressive if you look at

the free cash flow for 2022 this is a

company that's killing it with cash cash

for the entire year of 2022 you're

sitting at free cash flow of about 15

billion dollars so plenty of cash the

question that you have to ask yourself

is if you want to make or if you want to

make a meta investment if you're asking

yourself should I invest in meta is

you've got to ask yourself do you

believe in the potential future of

reality Labs because that's obviously

where a lot of money is going right now

uh twice as much of their free cash flow

is basically going into research and

development and that's expected to

continue so you have to believe that

ultimately reality labs and virtual

reality is as they say the next

evolution in Social technology and if

you don't believe in that probably don't

want to invest in Facebook now keep in

mind there are also other players in the

space take a look at Apple's upcoming

mixed reality of virtual headset this is

a Bloomberg piece breaking down exactly

everything you want to know about it

I'll give you a quick picture of roughly

a rendering of what it might look like

you could see that on screen here look

pretty cool some people say it's a

little bit uncomfortable though based on

some of the people in the beta for it

well probably more like an alpha for it

but anyway Apple's long anticipated

mixed reality headset isn't a an attempt

to recreate a 3D version of the iPhone

operating system so think about

basically uh apps and icons on uh on

sort of a 3D augmented reality space in

front of you and somehow being able to

control those buttons with gestures so

there won't actually be a hand control

device there'll actually be cameras that

look down at your hands to try to

understand what you're gesturing so you

can kind of move around or maybe touch a

keyboard or something that'll be quite

interesting now the expectation is this

will cost about a thousand bucks and uh

it's a likely to be named reality Pro

which I feel like is a little bit of a

jab there at meta versus expenses on

reality labs

uh and uh then in the future they expect

to potentially come out with a thousand

dollar product uh like a lower cost

product so starting with the premium

tier and coming down hand and eye

tracking capabilities uh ability to

connect to external or become an

external display for connected Mac uh

basically you'd zoom in pinch with your

fingers and your thumb they'll also be a

little wheel which I think is kind of

cool at least it's the rumor that you'll

be able to kind of go from virtual

reality to augmented reality so that way

you can see the world in front of you

with sort of a layers of apps and stuff

I think it'd be neat if I were ever on a

run to be able to wear something like

this if they got light enough and the

battery packs got light enough to be

able to kind of see the world but then

have you know news up or something I I

don't know it's maybe that's a bad thing

but that's kind of what I envisioned for

this but I think uh Apple is doing this

with a separate battery pack that you

would carry separately uh and it's not

actually on the head device unlike the

Facebook version which is on the head

device a lot of people talking about

this is potentially being useful for

health tracking video games uh I think

maybe like one-on-one face times will be

useful with couples for this or maybe if

you're in the future in a self-driving

car or you're on a treadmill uh this

could be kind of useful M2 will be made

with Taiwan semiconductors enhanced five

nanometer technology and it's a neural

processing units can any 20 billion

transistors this will be a 25 increase

from the M1 some testers have complained

that it could be a bit cumbersome

headset battery pack lasts for about two

hours

and people will be able to try it out in

the uh in the actual Apple Store now the

reason I bring that up with meta here is

obviously because there's competition in

that reality loud space and Apple's the

big boy coming in we could actually look

at segment information here at Facebook

and see that uh reality Labs let's see

here reality labs labs absorbs

um this is quite interesting how this is

aligned there we go these align like

this and then we have family of apps

here reality Labs reality Labs showing

I don't know why this is so uh

misaligned here it's so difficult to

understand reality labs this is segment

info of Revenue there we go okay reality

Labs created 727 million dollars of

Revenue and uh reality Labs cost about

4.2 billion dollars almost a billion

dollars more than uh what the company uh

or or what the loss was last year so you

get about 4.2 billion dollars going into

reality labs and losses and that is just

in the last three months of 2022 which

means if you look at that on an

annualized basis they're spending about

17 billion dollars a year uh in losses

on the metaverse

so again even though they're buying back

shares the numbers aren't as bad as

expected in the long term you got to ask

yourself how much do you believe in the

potential for a company that's shrinking

Revenue to be able to turn around and

start creating revenues again uh and

that's ultimately a question you have to

ask yourself as an investor now one of

the things you can do to help you along

with that is we could look at Wall

Street consensus estimates and if we

jump over to uh Facebook for uh Wall

Street consensus estimates yeah let's

see here we can find out that the

projected earnings per share for

Facebook in 2023 is

11.4 dollars and that could grow by

about 20 percent for 2024 and 2025 but

things get really blurry after 2024 and

2025 where Wall Street actually thinks

that earnings are going to go negative

Again by 2026 and 2027. so in other

words unless you start producing revenue

from reality Labs by 2026 your earnings

are probably going to start declining

again which would make your cost per

growth very very expensive at Facebook

but consider that companies multiples

right now right now Facebook stock in

the pre-market is trading for about a

buck 85. divide that by about 11.4 and

you're trading for about a 16 times

multiple if you think that the company's

going to grow at 16 in the foreseeable

future you're really only paying about

one times for the growth PEG ratio right

dividing 16 times earnings by 16 growth

you're about a 1x however if Facebook

doesn't end up pulling it off with

reality labs and their growth ends up

only sitting around a measly let's say

two or three percent on average over the

next few years or let's just go with an

even five to make math easy well then

you're probably paying closer to 3x on a

peg-based ratio and that actually makes

Facebook look very expensive so an

investment into Facebook right now if

you're making a longer term investment

is solely based on the growth you expect

from reality Labs personally you can

make a similar sort of analysis I think

you can make a similar sort of analysis

on Intel Now intel is a company that's

going through very much a similar

transition as Facebook except rather

than betting on the metaverse Intel is

betting on three and four nanometer

chips which are Advanced chips then to

be developed in new Fabs that they're

building in Ohio and expecting to come

online by 2025 right now they use a lot

of uh TM they actually use a lot of

Taiwan semiconductors for for their

building and so if you're heavy into

Taiwan semiconductors and you're looking

for potentially potentially a value play

on a transformation maybe Intel is that

opportunity where you're actually

hedging against tsmc because now you

have an American manufacturer the

largest American manufacturer and you're

betting on sort of a turnaround

personally I would rather make a bet on

the Intel turnaround thanks to the chips

Act and the Tailwinds that that has

versus a bet on the metaverse because I

don't actually think we're close to the

metaverse yet I think the metaverse is

something that would be ready player

1esque maybe in the 2030s plus but I'm

not convinced that Facebook will be the

one to actually get us there and so I'd

rather wait to see what actually happens

before I make the BET and so when it

comes to advertising I actually am much

more interested in a company like trade

desk now don't get me wrong trade desk

has not reported earnings yet and this

is going to be big foot and mouth if

face or if trade desk ends up missing uh

but I will tell you this oh my God trade

desk is up eight percent in the

pre-market right now I have no idea why

possibly just off the back of Facebook I

just realized that trade desk is up at

56 dollars tradisk is one of my my it's

actually my largest advertising holding

in my portfolio now I want to explain a

little bit about uid2 because there's a

lot of confusion about uid2 so uid2 is

something you have to know when it comes

to advertising because it's basically a

new form of a cookie it's an opt-in

cookie where basically you opt in to be

tracked for your phone number your email

to be tracked and initially you might

think to yourself why would you want to

opt into that well you're right most

people won't in fact only about 10

percent of people are expected to opt in

to uid2 style tracking or really any

kind of tracking however all uid2 really

needs is about 10 percent of people to

opt in and then they can model the 10

percent of people who opt in model their

behavior and their characteristics

against the characteristics of other

people who behave in a similar way and

this is why

uid2 potentially raises your uh CPM

metrics on Advertising by as much as 116

percent compared to companies using

third-party cookies that's really good

on top of that some companies estimate

that their reach has increased as much

as 40 percent and potentially led to a

one thousand percent increase in their

actual return on spend now this is

incredible and some of this information

is uh you know brought To Us by Pub lift

which in the advertising space could be

a little bit uh uh a little bit on on

the buy side uh but uid 2 is worth

noting it is an open source Tech and

it's basically your new version of

cookies and trade desk is one of the

companies that's in Connected TV

advertising where uh through uid2 and

with connected TV advertising trade desk

expects to be able to blow up their

advertising Revenue now no guarantees

but it's basically the New Frontier for

advertising where people are saying look

why do we want to be on Facebook when

you have problems with being able to

track advertising success when you could

move over to the new technology which is

uid2 again an open source framework and

the goal of it is actually to protect

user privacy and now that's interesting

because this is kind of the chart of how

it works I'm not going to go super

detailed into this but basically the

user visits a website the publisher

explains hey you know do you want to opt

in basically and it gives you the option

10 of users let's say opt-in now that

creates a token for that user and only

the non-public information is

transferred to basically the auction

websites for advertising and you get

this exchange of of information for

being able to basically attract people

on the internet and again if you can

model around the 10 of people who've

opted in then you can continue to sell

more ads more effectively and I think

the best thing to do is just look at the

success that some companies are having

and some companies are having great

success so for example if you look at

Cocoa Village they're the ones talking

about a massive uh increase in uh return

on ad spend and a substantial boost in

reach on top of that uh you're seeing uh

a trade desk very optimistically argue

that this recession is an opportunity

for them to actually gain more market

share and get people realizing look in a

recession companies are going to have to

be more careful with how they spend

money so why would you spend money on

regular TV advertising when you could

use connected TV advertising or you

could get the advantages of uid too

through some of the services that a

company like trade desk provides why not

go to a company like trade desk and have

a substantially more efficient

advertising platform than than

potentially waste your money on Facebook

like I'm not trying to bag on Facebook

obviously I'm biased here I invest in

trade desk and I don't invest in

Facebook because I don't believe in

reality labs and I do believe in uid too

but it's an interesting thing to think

about again this will all be foot and

mouth if they miss earnings here uh when

when earnings come up but it's

fascinating because you are in this sort

of Brave New World of advertising where

Snapchat's having trouble figuring it

out their user base is very young

Pinterest somewhat a bit of a Dying

platform Google is getting sued by the

Department of Justice for potentially

being a monopoly on sell side

advertising for brokering website ads

then you have Facebook which is throwing

all their money away on reality labs and

so when you start looking at the

advertisers who do you really have left

that's like a pure play Advertiser well

in my opinion one of the few Pure Play

advertisers is trade desk on the other

hand you have apple but apple is great

uh uh on one hand because of Apple ads

you know obviously a little bit biased

with apple because Apple can kind of

make it harder for everybody else to

advertise while at the same time

pitching their own ad business but

Apple's not a pure play ad business

right Apple's a products and services

business

and then there's a little bit of

advertising in there so from a pure play

advertising point of view I think trade

desk is probably the the best option

that exists hashtag no guarantees

obviously uh and uh then after that

you're probably maybe considering

companies like Disney or uh Netflix for

their exposure to TV advertising but

then again I'm not entirely convinced on

their ability to convert uh ads to

profitability through Disney Plus or

Netflix and instead I'd rather be

investing again in the pickaxe instead

of the company itself in that case and

who's the pickaxe for Disney's connected

TV trade desk so kind of all points back

the trade test now again no guarantees

but I'm very very excited uh about trade

desk in the advertising space and I

think it's a good place uh to to have

exposure uh especially since your

financials pretty solid again no

guarantees few fourth quarter is going

to be great but you've got revenue that

increased in the third quarter year over

year 30 percent uh now what we can do is

we can kind of compare that to what it

was in the prior nine months to get a

little bit of a trend I I don't have

that written down here so let's do that

really quick let's divide

divide by 808 that puts us at about 35

so you've got a slight slow down that's

already been realized but uh you've had

so in other words you had 35 growth in

the first nine months of the year down

to about 30 growth still growth uh but

what I love about this company is the

margins uh that they have and we've

gotta unfortunately what then that makes

this a potentially a little bit harder

one to analyze is the pink that I've

highlighted here shows a single one-time

large boost in stock based comp for the

CEO a little bit of a problem here

because it makes it look like trade desk

almost lost money they didn't they made

about 16 mil but it's a substantial

plummet from the 2021 60 million rev or

net income rather if in the fourth

quarter growth stays stable at above 25

and we get that stock base comp out we

should see some pretty good margins at

the come company which is exciting to me

especially since their platform

operations are basically their their uh

uh margin right that's for gross margin

so if we look at 70 million dollars in

expenses out of 394 million Revenue

you're only talking about 17 in expenses

which means you've got about an 82

percent gross profit margin Opex grew at

uh about 44 so we want in terms of sales

and marketing so we want to keep an eye

on potentially sales and marketing

growing faster than rev so this is not a

risk-free company but it's definitely a

company that I think has upside from

here and again no guarantees but it's

one I'm excited about so uh these are

some of the things that fundamentally

I'm uh watching and curious to know your

thoughts so uh leave me some comments

now uh you know question here what about

Google uh you know Google Google I think

again great exposure for uh for what

you've got uh to YouTube big fan of that

however YouTube Red Avenue actually

suffered a decline in the last Google

earnings report now we're going to get

Google earnings today so hopefully it

goes back that's what I'm going to be

looking for in the Google earnings is

I'm going to be looking for a return to

YouTube advertising growth take a look

at this this on screen right here is

Google's uh ad network uh income and you

could actually see that in 2021 you got

7.2 million dollars for YouTube ads but

only 7 billion dollars uh in 2022 which

is a decline of about 1.85 percent

Google search still grew but then again

Google search is where they're suffering

from the uh Department of Justice

inquiry into into their models right so

and you've got Google Cloud growth

slowing so these are some things to pay

attention to for Google again not a pure

play advertising play uh so again

watching I think the next earnings calls

especially the Google one today will be

very insightful and and those will be

things that I'm paying attention to but

some of my thoughts there on the

advertising amazing sector hopefully

that on Advertising was insightful or

interesting to you