Meta’s META Facebook is the largest social network in the world, with nearly 3 billion monthly active users.

The growth in users and their engagement, along with the valuable data that they generate, makes Facebook and Meta’s other platforms attractive to advertisers.

The combination of these valuable assets and our expectation that advertisers will continue to shift their spending online bodes well for the company’s top-line growth and cash flow.

Meta has attracted users and increased engagement by providing additional features and apps within its ecosystem. With more user interaction among friends and family, the sharing of videos and pictures, and the continuing expansion of the social graph, we believe the company will steadily compile more data, which Meta and its advertising clients then use to launch online advertising campaigns targeting specific users.

While utilization of consumer data is under scrutiny, we think Meta’s large audience size will still attract ad dollars.

Growth in Meta’s average ad revenue per user indicates advertisers’ willingness to pay more for ads, as they expect high returns on investment from these targeted efforts.

Key Morningstar Metrics for Meta

  • Fair Value Estimate: $260
  • Star Rating: 4 Stars
  • Economic Moat Rating: Wide
  • Moat Trend Rating: Stable

Economic Moat Rating

Meta’s wide economic moat is based on network effects around its massive user base and intangible assets consisting of a vast collection of data that users have shared on its various sites and apps. Now that Meta has emerged as the clear-cut social media leader, we believe that its offerings—consisting mainly of Facebook, Instagram, Messenger, and WhatsApp—have strengthened the company’s network effects: All of these platforms become more valuable to its users as people join the networks and use these services. These network effects serve to create barriers to success for new social network upstarts as well as barriers to exit for existing users who might leave behind friends, contacts, pictures, memories, and more by departing to alternative platforms. Meta has also developed intangible assets. Its large and growing user base and the rich data that it generates help advertisers post more effective ads, resulting in high returns on investment. With those higher returns, more advertisers jump on board, allowing Meta to further monetize the network.

Read more about Meta’s moat rating.

Fair Value Estimate for Meta Stock

Our fair value estimate is $260 per share, which represents an enterprise value of 14 times our 2023 adjusted EBITDA projection. We have modeled 10% average annual revenue growth over the next five years. As the company plans to continue to invest in research and development, content creation, data security, and virtual/augmented reality offerings, we see the average operating margin declining further in 2023. After that, it is likely to expand as revenue growth accelerates. We expect an average operating margin of 30% during the next five years, below the previous three years’ 34%.

Read more about Meta’s fair value estimate.

Risk and Uncertainty

We believe that while barriers to exit for Meta’s users may be increasing, the risk remains that another disruptive and innovative technology, like TikTok, will come onto the scene and luring users away from Meta and its apps. We do not expect competition in the form of a substitute for Meta, as most consumers are users of more than one social network. However, given the fixed number of hours per day, increased usage and engagement on one social network could come at a cost to other social networks, reducing user engagement and the potential return on investment for advertisers. Meta’s heavy dependence on the continuing growth of online advertising could heighten the negative impact of a lengthy downturn in online ad spending, resulting in a much lower fair value estimate.

Read more about Meta’s risk and uncertainty.

Meta Bulls Say

  • With more users and usage time than any other social network, Meta provides the largest audience and the most valuable data for social network online advertising.
  • Meta’s ad revenue per user is growing, demonstrating the value that advertisers see in working with the company.
  • The application of AI technology to Meta’s various offerings, along with the launch of virtual reality products, will increase user engagement, driving further growth in advertising revenue.

Meta Bears Say

  • Meta is currently a one-trick pony and will be affected severely if online advertising no longer grows or if more advertising dollars shift to others like Google GOOG/GOOGL or Snapchat SNAP.
  • Many of Meta’s customers may also belong to other social networks, such as Snapchat or TikTok, so the company will continually have to fight to capture a user’s time and engagement with its properties.
  • Regulations could emerge that limit the application and collection of user and usage data or restrict acquisitions, affecting data utilization and growth.