Is Facebook (Meta) Really Worth $750 Billion?

When discussing the market capitalization of Facebook (now known as Meta), the question often arises whether such a valuation is justified. With people buying shares at this market cap, it defines a level of trust and belief in the company's future. Performing a fundamentals sanity check is crucial to understanding if this valuation aligns with the company's performance and growth potential.

The Current Market Cap Context

As of the most recent quarter, Facebook reported an operating margin of 32% in Q2 and a revenue growth of 18% in Q1 (before the pandemic), with revenue exceeding 70 billion dollars. Using a 10.6X revenue multiplier, the company's market capitalization of 750 billion dollars is not out of line with this data. To further explore this, we can look into the SaaS Rule of 40, which is generally a benchmark in the SaaS industry.

The SaaS Rule of 40 Explained

The SaaS Rule of 40 is a common heuristic used to measure the performance of SaaS companies. According to this rule, a SaaS company's sum of its revenue growth rate and its operating income margin should ideally range between 40% and 80%. If a company can hit this target, it is considered to be in a favorable position for growth and sustainability.

Applying the SaaS Rule of 40 to Facebook (Meta)

Let's break down the numbers to see if Facebook (Meta) meets the SaaS Rule of 40:

Revenue Growth Rate: 18% (Q1 2023) Operating Income Margin: 32% (Q2 2023) Total sum of Revenue Growth Rate and Operating Income Margin: 18% 32% 50% (Q1 2023)

The sum of 50% is within the favorable range according to the SaaS Rule of 40, suggesting that Meta is performing well and has strong growth potential.

Long-Term Growth and Portfolio Expansion

Morningstar analyst Peter Dieterich believes that Meta's current $750 billion valuation is justified due to its anticipated long-term growth, including the expansion of both Facebook and Instagram and the standalone installation of WhatsApp. This portfolio diversification can provide a broader base for future revenue and earnings growth, contributing to the company's high valuation.

In September 2023, Foster noted in his writings that besides the 18% revenue growth, Meta is also seeing an 18% growth in its Cloud business. These positive trends suggest that the company has a strong pipeline of future opportunities and can continue to expand its market share.

Future Challenges and Risks

While the current performance and growth trends are promising, there are also challenges and risks that need to be considered. For instance, the regulatory environment, particularly in Europe, can pose a threat to Meta's business model. The company is currently under pressure to adopt stricter data sharing policies, which could impact its revenue and user base in the long run.

Additionally, the consumer shift towards privacy-focused platforms and social media alternatives may impact Meta's user retention. As users become more cautious about their online footprints, Meta needs to adapt its strategy to maintain user engagement and loyalty. This requires continuous investment in research and development to innovate and stay ahead of the competition.

Conclusion

Given the strong fundamentals and the performance of Meta, the $750 billion market capitalization is not unjustified. The company's growth potential and diversified portfolio, coupled with the positive revenue and operating margins, align with the SaaS Rule of 40. However, Meta must navigate the challenges and risks associated with regulatory pressures and changing consumer behaviors to maintain its high valuation. As a leading technology company, Meta's performance and future prospects are closely watched by both investors and the technological community.