TIVP056: Meta (META): Is Meta Undervalued Again? w/ Daniel Mahncke & Shawn O’Malley

24:22actual rocket scientists and CEOs. And despite those different backgrounds, what connects all of us is the passion for value investing and continuous learning. And each week we host live calls, covering everything from vetting the group's best stock pitches to analyzing portfolios, investing case studies and conversations with expert guest speakers who are either prominent portfolio managers, CEOs or authors. And the best thing is that if you ever miss a call, We have a library of recordings for watching back every single call we've ever hosted. And if you prefer reading over watching, well, then we have dedicated spaces in the community to share write-ups, discuss investing ideas, or just your thoughts on the general market.

25:03And multiple times a year, we bring the community from the virtual world into the real one, including private dinners in Omaha for Berkshire weekend, and meetups in New York City to explore, hang out, and most importantly, talk stocks. Our last cohort of members brought together 20 incredibly thoughtful people, some of the sharpest investors that Sean and I have ever met. And if you want the chance to learn alongside people like that, you should join our waitlist at theinvestorspodcast.com slash intrinsic value community. That's theinvestorspodcast.com slash intrinsic value community. Just like everybody else, there was a time when I was a beginner investor.

25:44And I have to say, investing is particularly filled with jargon that can just make it so difficult for new investors to understand what is going on. But it's never too late to get smarter about stock investing from the ground up. At The Investor's Podcast Network, we've made a habit of studying the world's best investors. And now I'm distilling those learnings into a simple course for you or for anyone in your life who you might want to share the gift of knowledge with. With my How to Get Started with Stocks course, you can master the principles of excellent lifelong investing with valuable insights for both beginners and pros.

26:14The course covers 10 different sections, beginning with the basics of what a stock actually is and how the stock markets work, to strategies to optimize your retirement savings, how to pick great companies for the long term, what to look for in ETFs, and how to monitor your investments, plus so much more. To begin getting smarter about investing, just visit theinvestorspodcast.com slash get started with stocks. That's theinvestorspodcast.com slash get started with stocks. And for a limited time, you can use code STOCKS15 for a 15 % discount at checkout. The point being there, the rest of the Mag7 is betting hundreds of billions of dollars on LLMs and the data centers and energy needs underpinning those models.

26:58whereas Apple is taking this wait-and-see approach, which on the surface looks very pragmatic, but the concern is that by outsourcing the development of this technology to other players rather than making their own in-house solutions, they'd effectively be cutting into their own moat going forward, especially in this new era of AI-powered devices if their AI is being powered by somebody else. And I don't know, personally, I'm not sure how I think about it. Like I said, I think there is something pragmatic about resisting the pressure to dump tens of billions of dollars into a space that is probably well beyond their core competency.

27:34People always like to say that Apple is not a tech company truly, and it's a consumer products business. And if that's true, then keeping out of this AI gold rush would be indicative of that. That would be on brand, which is not to say that there won't be any AI baked into Apple devices because they already know that that's not the case, but more really to say that they might wait and see how things progress and then release a very polished, user-friendly implementation down the road. That would better align with the usual Apple strategy historically. Don't bet on the cutting edge of tech, but do be the best at making cutting edge tech usable by the masses.

28:12And that's probably enough of a tangent on Apple though, but it's really the opposite approach from Meta where Meta is jumping in and trying to pioneer entirely new businesses around unproven customer experiences. And so that does make me hesitant. I don't want to say I vastly prefer the more passive Apple strategy, but man, I'm not sure Meta's process reflects their core competencies and product ecosystem very well either. I see why Google is doing AR glasses, for example, but I can't say I get why Meta is betting the farm on it. That's just me though. I want to ask you, what's your final verdict on reality labs?

28:51I mean, do you think it is something that can turn into a success in the long run with any meaningful likelihood of success? Or is the picture really as bad as it looks when you just look at the numbers on the 10K statements? Again, I mean, I think I'm impressed by the tech. And as a consumer, I would really hope that this product is as good as they advertise because I would love to have glasses like that. but at the same time and having said all of that I don't think it will be a new iPhone moment and I just struggle to see Matter succeeding despite its leading position to date so the disadvantages compared to both Google and Apple in my opinion are just too significant and even from a user perspective I mean Matter's reputation is much worse than competitors so when it's about literally walking around with a camera a tracker and a microphone on your nose all day.

29:40I just don't know how many people would want Matter's glasses on their face compared to either Apple's and potentially even Google's. And that might not be a rational argument because all big techs will likely care little about respecting your personal data, but Matter might still be the least trusted Mac 7 company out there. And last but not least, if you do the math, and that's kind of what we want to do as investors here, you have to ask yourself how successful Matter's AR glasses would need to become so that you could say Reality Labs and all the investments in that segment have been actually worth it.

30:11And again, the most bullish scenario is that AR glasses would become the new iPhone and then Meta will be the Apple of that new industry. So when we look at how much money Apple has made with the iPhone, it comes out to about a trillion dollars cumulative since 2008. This obviously includes other products as well, but I think it will manage for our calculation here, which is, you know, kind of rough. Now, assume Reality Labs produces a similar outcome in terms of scale and free cash flow. The next question would be how much Meta invested at that point in time. And Meta has already invested, like I said, $100 billion in Reality Labs.

30:47And yes, the products are good today, but there's still a long way to go. And if we assume its iPhone moment comes in, let's say, 2035, that would be another 10 years of investments. And at the current rate of investments and with the cost of capital in the, let's say, mid to high single digits, it is completely reasonable to end up with an effective investment base of roughly$350 billion by the time Reality Labs actually works out. And if we calculate then the implied internal rate of return, we would end up somewhere in the mid to high teens. And I don't know about you, but that does not sound very bullish to me considering the huge assumptions behind this, which again is that AR glasses will replace smartphones and Meta will become the leader in that new category.

31:31I don't think it's an outcome that I would personally want to bet on. But if I were to summarize, it sounds like you think it's unlikely Reality Labs will ever become a meaningful contributor to shareholder value for meta investors. So when we go to value the company, we almost need to think of it as kind of penalizing the higher quality parts of the business that we find more attractive. Which is not to say that we don't want to invest in meta at all. But you do have to put those pieces into context as one part of the pie is very actively subtracting from the other part of the pie. And we are not entirely sure that we think that bet will ever pay off.

32:11Yet all of this might come across as pretty negative, but I think it's just all of us know how great of a business the family of ads are. And we will talk about them later on, I'm sure. But at the same time, if you think about the call options that Meta has, the fact is that you have to pay a lot of money for those call options. Usually what we look for is a company that has a great business model, but it's cheap enough so that the call options are stuff that you don't pay for. And either they work out, and that would be fantastic, and if they do not work out, you have a solid base case. And in this case, I think you have a fantastic company if you just look at the ads business, but the call options that you do have, at least in terms of the Reality Lab segment, they're pretty expensive.

32:51For anybody watching on Spotify or YouTube, We have a chart on screen currently that once again is showing the enormous amounts of money spent by the Mag7 on this AI arms race, for lack of a better word. It's probably a bit more nuanced than that. As you just alluded to, AI is used in basically all of Meta's products from software and algorithms to hardware. And yet it's still a huge bet on one type of technology. meta alone is expected to spend over a hundred billion dollars in 2026 on mostly ai related capex and man i'm still trying to understand where ai creates the most value for meta honestly it can clearly improve the business in many smaller ways but the open question for me is whether these improvements are large enough to justify the scale of capital meta is now committing to ai infrastructure and you just mentioned how you don't think that the hundred billion dollars plus that was already spent on reality labs will turn into a great IRR investment for shareholders.

33:53And some of the contracts that individual AI experts are being signed to at Meta would really make a lot of sports stars blush in how big those deals are. And so my question for you is whether you see these investments as being on par in terms of uncertainty of profitability as reality labs, but maybe just on a bigger scale? Is that kind of the nightmare scenario here with these AI bets? I mean, when I thought about Matter's AI efforts, Lama was the first thing that came to my mind. It's Matter's answer to both ChatGPT and Gemini. And depending on the ranking, you could say it's probably a top five model compared to the usual suspect.

34:31But that is just likely not worth that much. Sean and I use AI tools daily. And while I wouldn't describe myself as a super user, I think just given the sheer amount of time we spent with those tools, we probably kind of are. And not once did I try a llama. You just don't go for the fourth best model. And just recently, one of Matter's longest standing top AI researchers, Jan Le Koon, claimed that they used different models for the benchmarks to make the model look better than it actually is. And he was also very critical of LLMs in general, and especially Matter's AI efforts. And I probably should say that he's not your average AI scientist.

35:07He's somewhat of the godfather of AI. I guess you still have to take it all with a grain of salt though since Meta's hiring offensive in the AI sector was also due to Zuckerberg thinking that the current team is not yet on the trajectory that he wanted them to be on and Jan LeCun was more or less leading that team so he was kind of degraded when Zuckerberg put the much younger Alexander Wang in charge of the new AI efforts but that's just kind of a peek behind the scenes at the drama that's been leaking out from Meta and their AI department? A lot of the news that came out in both recent days and also the weeks feels very personal, to be honest.

35:46But I mean, even Alexander Wang is supposedly not entirely happy with how things are going. And it just seems as if Meta's AI efforts, or more precisely, the LLM and the super intelligence efforts, are just not fully on track. And beyond Lama, Meta is actually quite successful using AI. It's arguably one of the companies, one of the only companies that has already seen significant returns on its AI investment. Because the main use case is the so-called attention and distribution machine that basically decides what gets recommended on Instagram. So what shows up in reels, which ads you see, all of that stuff.

36:20So the biggest AI product Meta has is the family of apps itself, getting better at predicting what people will watch, click, share, and in the end also buy. And according to Matter, end-to-end AI-powered advertising tools have achieved an annual run rate of exceeding$60 billion already. And after we did the top stocks for 2026 episode on We Study Billionaires with Clay, I thought more about my personal use of Matter's apps and just realized something that honestly shocked me a little. I'll go on a little tangent here, but I think it's quite interesting. I always had a thing for watches. I guess it's coming for my grandpa who used to have a little watch collection.

36:58And I'm certainly not the most knowledgeable. And for a long time, it was more about liking the looks of them than actually getting into it and buying some watches for myself. But when I first started making some money in college, I put a bit aside here and there with the idea being that one day I might find a model that I like and I'll buy it. Being the value investor I am, I never actually bought one and instead put all of that money into my portfolio. But in the last couple of months, I got back into the topic and started looking at some models. And since then, Instagram bombarded me with ads for watch shops, one shop after another.

37:32And I'm interested in vintage watches, so classy models. That's a niche part of the market. And I'm not lying. My Instagram usage has literally increased in the last few weeks. And most of the time I spent on Instagram was going through the ads. Yes, I went on Instagram, not for the memes or the reels, but to look through ads that they've shown me. And with every other social media, but even website, I feel like ads are this disruptive or worsening thing for the user experience. On Instagram, I literally opened the app to look at the ads because the targeting was so good that it just became a part of my shopping experience.

38:07And I didn't even realize it while I was at it, but I was shocked when I thought about this. And I'm not even on social media a lot. But as you know, I never had TikTok. And even when I realized I look at an app like Instagram for more than 10 minutes, I just decided to go outside and go for a walk to clear my head instead of doom scrolling. And now here I was opening Instagram just to look at ads. And it also shows you the vast range of brands that advertises on Instagram. I mean, I'm talking Rolex, Patek, Philippe, Omega, and dozens and dozens of vintage shops. It honestly sounds a lot like Netflix to me, where the algorithm is so good.

38:44people found themselves going to Netflix to have it tell them what to watch while only going to other streaming apps for specific shows they already knew they were interested in. And that's a really massive advantage that shows up very subtly. And to the extent that others go to Instagram or other meta products because they know that ad targeting is so good and they'll find things they're genuinely interested in. Well, that's very promising. And I'd never really thought of it that way, but I can see what you mean. I think it's easy to underestimate how much runway there still is in advertising alone.

39:20And as you said, it already feels like every major brand advertises on Instagram. And of course, that's been true for years. Yet despite that, Meta continues to take share both in the US and globally. And in fact, Meta has been growing its share of US advertising faster than almost any other company at its scale. And on top of that, you have a very strong structural tailwind behind the business. Since 2016, total US ad spending has more than doubled. And a meaningful portion of that spend is still sitting in these legacy channels like TV, print, and radio. And as that money continues to migrate toward digital outlets online, Meta remains one of the primary beneficiaries of that trend.

40:00And you put those two forces together, share gains and a growing overall market, and gosh, it's just not hard to underwrite double digit growth at a minimum in the ads business for many years to come. The only thing I like to see, and I actually like it because it shows that I have still some privacy, is that they also show me watches that I could never afford in my life. So I thought, okay, well, fortunately, they don't know that much about me. But just to give you some perspective, probably on advertising and different social media apps, I actually used Reddit quite a bit to get some background on some of the watch models.

40:31And I must say it was very helpful. The content over there was great. I didn't get a single ad though that met the topic. So I don't know whether that's because the algorithm is not yet as good or whether there are simply no advertising brands in that space on Reddit. I think the potential is definitely huge. And I'm pretty sure it's probably only a matter of time before we see many more brands and especially SMBs advertise on Reddit, which is obviously good because it's one of our portfolio holdings, which performed phenomenal since we bought it because you did the pitch and I was still doubting it.

41:02but you told me, Daniel, trust me, the ads on that app will only get better over time. And I think that will do. I still feel like this should have been an even better place than Meta should have been for, especially these niche vintage watches I was looking for. So long story short, and I know this has been somewhat of a tangent, Meta's ad algorithms are just incredibly good. And a big part of that is AI improving them. And we shouldn't forget that just a couple of years ago. In 2021, Apple's iOS privacy changes caused pretty fundamental change for Meta. Before those changes, apps like Instagram could just track your behavior across different apps and different websites.

41:38And after the update, these apps had to ask for consent. And obviously, most users declined with opt-in rates of about 20 to 30%. And this led to both worse targeting, but also lower conversion rates. And therefore, advertisers were unwilling to pay the same prices as before. And the average price per ad in 2022 declined by 16 % and just one year later it declined by another 9%. And in part those decreases also had to do with the success of Instagram's Reels which are these short videos that you can see on Instagram by now. They've been very effective at keeping people engaged and thereby increasing ad volume but they weren't yet monetized to the same extent as the typical in-feed ads or the ads that you see in the stories.

42:19That has changed though. Generally when a lot of If new ad inventory opens up, ad prices will drop at first because the auctions for them are just less competitive. But at a lower price, the ad space is obviously even more interesting for advertisers. So they bid up prices quickly. And that's sort of the cycle that you see again and again when Instagram has new features, increases the amount of ads that you can show on the app. The turnaround of the ads business is also very evident in another graph we're showing here on screen for anybody watching. We saw mid-single-digit declines in 2022, basically driven by lower ad pricing, followed by what was a pretty speedy recovery in 2023 with growth stabilizing to over 20 % from there.

43:01And so at the end of the day, Instagram is the gold standard for monetizing social media. And there is no other app as effective for advertising, in my opinion. So ultimately, advertisers will take price increases. And that's exactly what Zuckerberg did when Meta was in this huge correction in 2022. And if you now layer the stock price over that chart that we have on screen, you can clearly see how it follows the growth rate of the ads business, which I don't think is too surprising since we know the Reality Labs is really not part of the business in a meaningful way and is a huge loss-making machine.

43:37But even still, the impact on the top line is pretty minimal. The ads business is definitely what drives Metastalk, that's obvious. And I find it amazing how this seemingly mature business is still pulling in growth rates like this. Again, you talk about apps that already reach three and a half billion people. And it's not like ad space wasn't used effectively in the years prior, right? But the longer term trend of impression growth is slowing down, as you would expect at some point. Worldwide impression growth in 2023 was around 30%, then dropped to as low as 6 % in 2024. and is now back in the mid-teens.

44:12And this trend has been offset by significant increases in price across basically all regions. But in the long run, it seems meta would probably need some new catalyst to keep growing at least at these rates above 20%. Low teens is likely achievable just by volume and also price increases alone in the next few years. But if you want to keep up these growth rates, you probably need something else. From Clay's brief meta pitch that he made, two possible catalysts that stuck with me that could achieve us, our AI content, and then monetizing on WhatsApp. And so many Americans will probably not appreciate the size of WhatsApp.

44:47I know that I certainly did not. And on our last few trips together to Montana and Portugal, when I wanted to reach Daniel, I had to go over to WhatsApp because there's a good chance that my iMessage would be ignored. And I don't say that to be snarky. It's just that Daniel and many others outside the US I've come to find just do not rely on iMessage in the same way. They're not used to checking for text there. And that was sort of unfathomable to me at first, but I've really come to appreciate that that is a reality. Globally, WhatsApp is the number one messaging app with about 3 billion monthly active users.

45:26And incredibly, Meta bought the company for only$20 billion back in 2014. But at that time, it had about 200 million users. So they have more than 15x the user base of WhatsApp over the last decade. And that's the home run of all home runs right there. And so part of the truth is that for the longest time, it didn't really make money though. It benefited the ecosystem, but to really call it a home run, you would expect it to make money for them as well. Well, especially now considering the huge capex that they put into AI. And I guess that's part of why Meta is doubling down on monetizing WhatsApp now.

46:06I mean, the core consumer product remains largely ad-free. Monetization primarily comes from WhatsApp business, where basically companies can create verified business profiles and then interact with customers and use messaging as a customer support or commerce channel. And then larger businesses pay Meta for messaging APIs. So we're talking transactional messages like order confirmations, shipping updates, customer service interactions. And this currently brings in about$10 billion in revenue, which is about two thirds from the overall$15 billion that WhatsApp is currently generating. And I feel like many people will have very different experiences with WhatsApp.

46:43I know you said WhatsApp is pretty scammy up for you with messages from people that you don't know. And I guess it's like that for many Americans. Way more people have iPhones there. So using iMessage just makes a lot more sense. For me personally, it's the other way around. As you just said, iMessage tends to be pretty scammy and I might miss messages there, as you said, which I'm very sorry for. Well, WhatsApp is just very clean and safe. And I guess that's also why I was a bit hesitant about the huge growth prospects that some people saw on WhatsApp. I don't want to be reached on WhatsApp for professional things or by companies.

47:16For me, WhatsApp is why I text with friends and with family. And when I'm waiting for a package, the message that I arrive can go to iMessage. And when I complete an order, the message can, I don't know, go to my email, but I don't want those messages in WhatsApp. Okay, I think it's safe to say I'm definitely learning a few things today, especially about how other people think about iMessage and WhatsApp. And yeah, it's just fascinating that two people using the same product with the iPhone and product ecosystem with Apple devices generally can land on such totally different perceptions of how to interact with pretty fundamental apps, right?

47:53And so I don't know, I think it should be easy though for Americans who don't use the app to see huge potential just in the numbers alone. We talked about the benefit of having different perspectives a lot on the show, especially having different consumer perspectives. And we live in different countries. And I think this is a situation where those different perspectives helps us a lot in understanding meta. And when we talked about Snapchat a few weeks ago, we mentioned how terrible the ad placement was and how it made the user experience so much worse. And so I guess my question for you, Daniel, is do you think something similar could happen to WhatsApp?

48:27As they try to monetize it, are they going to actually damage the relationship that folks like yourself have with WhatsApp and how they perceive it and maybe push people back to iMessage or some other third-party platform? I hope they don't. I really hope they don't. But I mean, Snapchat's ads, they're in the chat section. And in my opinion, they're just a terrible user experience. To me, it feels like just this massive invasion of privacy when there's a random ad popping up between private chats. And I never wanted to open them, but the notification was so annoying that sometimes you just have to open them anyway.

49:01And according to WhatsApp, they won't place ads in the chat section, which is the most important part of the ad, of course. So instead, they will be in the status section. And for anyone who doesn't know how WhatsApp functions, WhatsApp status is essentially the equivalent of Instagram stories. So we're talking short-lived photo and video updates that disappear after 24 hours. Actually, this feature is not even that old. It was only introduced a couple of years ago. And intuitively, to me, this doesn't feel like a particularly powerful ad surface, though, because at least anecdotally, I don't know many people under the age of 40 who use WhatsApp status.

49:36Then again, looking at the reported numbers, it might be a much bigger thing in international markets outside of Europe and outside of the US, because Meta claims that WhatsApp status has roughly 1.5 billion daily active users and describes it as the most viewed story product in the world. And if that is accurate, then my takeaway is that status has to be far more relevant in emerging markets where WhatsApp is not just a messaging app, but probably more like the primary social communication platform. And that's obviously great for reach, but it would also mean that the majority of impressions that you can get from these ads will come from regions with significantly lower RPU or average revenue per user.

50:16And ad impressions in India, Brazil, or large parts of Southeast Asia, they simply don't monetize the same way as they would in the US or Western Europe. And another way to monetize ads via WhatsApp is the so-called click-to-message ad format. And these are currently one of META's fastest-growing ad formats. And once again, I didn't really know about this feature before because I'm not on Facebook where most of these banners are. And also because it's, I think, more of an international thing, once again, the way it works is that you might go through Facebook, for example, then you see an ad for a product that you like.

50:51And then there's a little button that says, okay, well, message me on WhatsApp. And then if you do that, you can talk to the people in the shop on WhatsApp to just ask more questions and potentially that leads to a sale. And actually, while I did my, let's say, research on Meta, I was on Instagram and I saw an ad where I also saw such a button. It wasn't for WhatsApp directly, but it was for Messenger. So apparently they're not only in international markets, but also in Europe by now. Well, just based on what you've told me about WhatsApp's monetization strategy and the fact that they are sort of in the early innings of doing ads, probably a reasonable estimate would be maybe$1.50 in ARPU.

51:29I think it would probably be about double that if you include this click to message part. But I don't think there are many details available on that yet for Meta. And it's not really traffic that is monetized from users who started on WhatsApp. So it depends on if you want to count that as revenue from WhatsApp or revenue from Facebook. And that's where you get into some kind of the accounting weeds and nitty gritty. But if you take that$1.50 and multiply it by 3 billion users, you are talking about$4.5 billion in revenue, essentially. And that's actually not a lot for Meta, which seems kind of crazy to say, but we are talking about a$1.5 trillion company here, just as a reminder.

52:10And so again, these are all estimates and maybe ads will be significantly more successful than that on WhatsApp. But I think it's fair to say that we don't expect wonders coming from this monetization effort. It may incrementally improve and drive the business on the margins, but this is not going to be totally revolutionary in the way that Mark Zuckerberg hopes that Reality Labs will be. Where I think WhatsApp monetization becomes more interesting is business messaging. And Meta has been very clear that it sees WhatsApp less as an ad product and more as a business communication platform. And today, millions of businesses and emerging markets already use WhatsApp as one of their primary ways to interact with customers for support, order confirmations, delivery updates, and just any kind of basic inquiries, even if Daniel would prefer those messages go to his iMessage.

53:03But larger businesses pay meta for access to WhatsApp's messaging APIs, especially for transactional messages and for contacts. this is about two-thirds of WhatsApp's$15 billion in revenue right now. And the long-term vision is to turn WhatsApp into kind of a global customer interaction layer, is maybe how you'd think of it. So businesses could pay to message users, manage customer relationships, run this conversational commerce, and increasingly use AI-powered assistants to respond to customers at scale. And in that model, WhatsApp starts to look more like a CRM or customer service channel from the business's perspective embedded directly into the world's largest consumer messaging app.

53:48And if that works, the economics could be very attractive. I mean, the business messaging revenue is typically recurring, relatively sticky, higher margin, and less cyclical than advertising. And given WhatsApp scale, even modest monetization per business interaction could translate into tens of billions of dollars over time. This might actually be a good time to try and utilize, I would say, our audience. Because if you're from international markets like Brazil, India, or elsewhere, just feel free to leave a comment and tell us how you use WhatsApp. I think that would be a very valuable insight.

54:21Because if there's one thing I learned is that WhatsApp is, because it's a global app, used completely differently by so many different countries and cultures, basically. I asked international members in our intrinsic value community how they use WhatsApp and what the trends are in their home countries, basically. And this gave me a whole new appreciation for the monetization possibilities of WhatsApp. It turns out that WhatsApp business is already a huge thing in India, up and coming in Latin America. And even in some parts of Europe, you already see businesses doing that. A huge factor here, surprise, surprise, is AI once again.

54:54And I think I naively focused on just my consumer behavior to justify WhatsApp business is not yet a big thing here in Europe. I thought it was just because WhatsApp is, again, as I said, used to talk with friends and family. And users don't want it to be mixed up with business, shopping or whatever. I mean, I just know it from my personal experience. When I was traveling somewhere and I used WhatsApp business, I just hated the fact that I had all these business accounts hiding the chats that I personally have with other people. and I basically forget about them because I have all these business chats in front of them.

55:26I just didn't like it. But probably that's not the case for most people. I mean, as one of our members pointed out, the actual reason is probably more likely to be labor costs. So the fact that people in Europe don't really know that feature is since most WhatsApp business customers are small and medium businesses, so they have to pay someone who is essentially just answering these messages. And you can do that in countries with low labor costs, But it doesn't really make sense in countries with high labor costs. So that would probably be yet another use case for AI. Because if you implement AI chatbots to handle these conversations, you could potentially open up the entire European market, which also offers much higher margins for WhatsApp business.

56:06So some analysts, probably the ones on the more bullish side, say that this is at least a$100 billion annual opportunity. I'm probably more in the camp of wait and see. But who knows? I mean, after more than a decade, perhaps Meta has finally figured out how to monetize WhatsApp. The one thing I would still say is I'm not really certain that for the last decade, they just didn't want to monetize WhatsApp because it has been a topic for many, many times. And they just didn't end up actually at least successfully monetizing it. So I'm not really certain if it's about they never wanted to or just never really worked out the way they hoped.

56:42Okay. I think we covered the different call options that you see for Meta. the things that provide potential optionality to the upside, including Reality Labs and WhatsApp beyond this kind of core advertising business. And there are varying degrees of cost to support that optionality. And that's probably the most generous way I can put it, at least for Reality Labs. But how about we go ahead and talk about the core family of apps, Facebook, Instagram, and how AI has impacted the latest numbers there. And given the user count, it seems unlikely that user growth will be a major driver of future growth here.

57:21Growth is slowing. And at over 3.5 billion active users today, it is kind of just hard to imagine how much room there could be left to expand into. And yet you still see room for incredible top-line growth. Just in the last quarter, Meta grew the overall ads business by 26 % through a mix of increasing ad impressions and raising prices for those impressions. And at these rates, it's not unlikely that Meta will surpass Google search business within the next few years as being the biggest advertising business on earth. It's incredible. It's just incredible how Meta has managed to keep its apps relevant through all the change and just keep improving monetization.

57:59And I think it's very easy to miss, but the stock went down in 2022 due to many factors. Yes, in hindsight, it was one of the best buying opportunities in a Max 7 stock. ever, but there was a good argument to make that Meta's time has come. I mean, today, it's normal for us that TikTok and Instagram just coexist. But that was one of the threats that seemed pretty, pretty substantial at the time. And in our episode with Clay, he mentioned that Reels has become a$50 billion business, which is outstanding, considering it was only introduced in late 2020. It was one of the facts that just blew me out of the water.

58:35I wasn't aware of how big of a business it already is. And Reels has just done an incredible job of increasing users' time spent on Instagram and has essentially fought off the TikTok thread at all. And the more time users spend on the app, the more ads matter can show. And if Instagram Reels has generated about$50 billion in ARR and has been around for about four years, it was apparently responsible for the majority of top-line growth in that time period. And I don't say that as necessarily a bad thing. It just means that when this feature reaches maturity, which I think it will soon, then growth will probably need to come from somewhere else.

59:12And at least if you want to keep growing faster than 20%, that somewhere else is likely to be one of the options that we have discussed earlier in this podcast. And I think this is a main part of the Meta thesis, because at today's prices, you don't need 20 % growth to make a good return on Meta. It's trading at a significant discount to Google, Apple, and Amazon while delivering the best growth rates, especially in recent quarters. So Mena will keep being the best place for companies to advertise, and that's globally. So while the ad market is volatile, and there might be some weaker years here and there, the mix of more content and more impressions and just the price increases should, without a problem, lead to at least double-digit revenue growth, even without any of the call-ups such as WhatsApp or AR exceeding.

59:58And that's basically what makes this investment so attractive despite us basically bad-mouthing most of the call options on today's episode. Before we get to the valuation there are two things I still want to talk about the increase in content through AI and Meta's overall capex expenses and AI investments and back when I pitched Adobe I argued that AI would be a tailwind for Adobe due to the overall increase and content creation aggregate. And a similar dynamic applies to meta. AI meaningfully lowers the bar to creating content. And when content creation becomes easier, more content will be posted on Instagram and Facebook.

1:00:36And more content increases the amount of data available to train and refine their recommendation systems, which can improve engagement and time spent across Instagram, Facebook, and Reels. And higher engagement then expands available ad inventory and improves monetization efficiency. So Meta primarily monetizes AI through these second order effects rather than by building the best AI model and making money off of it. And the question then is how much incremental revenue this can generate and whether it justifies the huge investments Meta is currently making in AI. Yeah, I don't want to dampen the mood here, but unfortunately, I don't think anyone has that answer.

1:01:18I mean, perhaps we should first clarify once again what an outstanding CEO and also capital allocator Mark Zuckerberg is. I feel like that gets ignored sometimes due to the Metaverse disaster and his also stubbornness in putting brilliance into reality labs. But Meta was founded in 2004, which is only 21 years ago. So it's by far the youngest among peers like Apple, Microsoft and Amazon and even Alphabet. And it was the only company that reached close to$100 billion in gross profit in less than 20 years. 17 to be precise. And it was also the only company that reached almost$50 billion in operating profit in that time frame.

1:01:55So Zuckerberg definitely knows how to scale a business without spending a lot of money. The problem is that it seems that this skill has disappeared in the last few years. I mean, Meta has always had capex cycles. The first major one was when it had to adjust to the new mobile-first world in the early 2010s, and then another one when the content moved from text to photo and video. And that took more computing power, so it became more expensive for Meta to build out that infrastructure. Usually, though, CapEx as a percentage of revenue came down quickly as both revenue growth accelerated and then CapEx declined.

1:02:31And that has changed. With the Metaverse efforts and Reality Labs, beyond the reasons we mentioned earlier, the market panic in 2022 was also driven by a combination of revenue decline and higher capex. And since then, revenue growth has accelerated again, significantly, honestly, but capex growth has been even faster. It hasn't slowed down again. And with Meta's significant investments in AI, the times in which Meta is a high margin and especially a capitalized company might be over for at least a couple of years still. So it's safe to say that Meta has made some pretty insane headlines recently trying to poach talent from competitors and making just some big acquisitions in the space.

1:03:12We're talking about pay packages of up to$300 million for the world's best AI researchers, a$14 billion investment in a company called Scale AI. And just recently, Meta spent$2 billion to acquire the Chinese startup Manus. Manus is actually pretty interesting. I mean, tools like ChatGPT and Gemini, they are primarily general purpose assistants. So you ask them a question, they generate an answer and maybe help you write something or reason through a problem. But that's mostly it. They are reactive, as you might say. And if it comes to them doing any kind of task for you, they honestly do a terrible job most of the time.

1:03:50If you tell them, hey, could you work in this Excel sheet for me? They'll mess it up. Manus, by contrast, is built around the idea of basically having AI agents that actually execute tasks end to end. So instead of just responding with the text, a Manus agent can break a task into different steps, then use tools, pull data, run processes, and iterate toward an outcome. So for example, instead of explaining how to analyze data, a Manus style agent might actually run the analysis, update a document, or trigger follow-up questions. So the difference matters for Meta because agents like Manus fit pretty naturally into business messaging and then also customer support and all these internal workflows on WhatsApp or Instagram where the goal isn't just to answer questions but to actually resolve issues.

1:04:38So complete transactions and handle conversations at scale. And in that sense, Manus kind of complements Mattis' AI strategy by focusing less on conversation quality and then more on task completion, which is where I can directly create economic value. I've actually given it a try and I must say it's thinking for a long time. If you give it a task, it will take about 10 to 15 minutes. And depending on how good your prompt was, the results are pretty good. I don't know yet if I would still say that you see that an agent is critically thinking and then resolving a problem. It still feels like the thinking process is similar to what Gemini or JGPT do as well.

1:05:16It's just better for giving it an actual task. And then for example, say, put this into a PDF, which is something that JGPT is not very good at. Now, getting back to the investment side of things, the CapEx to depreciation ratio helps explain where we are in the investment cycle of a company. So when CapEx runs well above depreciation, which it clearly does now, it tells you that the asset base is still expanding rapidly and the depreciation hit from this buildout hasn't yet fully arrived. And that's important because it means current earnings are still benefiting from somewhat of a time lag. So over the next few years, depreciation as a percentage of revenue will go up.

1:05:56And we can see that already, at least to some extent, because it's currently creeping up to the range of like 90, 10 percent. So that's the accounting manifestation of today's AI spending, which will probably only increase in the years ahead. You also see the capital intensity in ROIC. when Meta spends heavily on AI data centers, servers, and infrastructure, those costs don't hit the income statement all at once. Instead, they are capitalized on the balance sheet as property and equipment. And that effectively immediately increases the denominator of the ROIC equation. And so meanwhile, the benefits of those investments, better ad targeting, higher engagement, new AI driven products, those will take time to show up in operating income.

1:06:41So for a period, you have a sharp rise in invested capital while profits comes at a lag, which serves to lower ROIC. And to get ROIC back to earlier, higher levels, two things have to happen. First, utilization has to rise. The AI infrastructure needs to be used more intensively so that it drives incremental revenue and operating profit without requiring the same pace of new capital spinning. And then secondly, the investment cycle has to mature. capex needs to fall closer to depreciation meaning meta is no longer expanding its asset base as aggressively and when operating income goes faster than invested capital either because margins improve or revenue scales on a relatively fixed infrastructure roic then naturally recovers and so in short today's lower roic returns on invested capital in a very important metric we discuss with every company we recover reflects a timing mismatch between upfront investment and delayed returns.

1:07:43And the path back depends on Meta proving that those returns actually materialize at scale. But that's enough ROIC. Let's talk about valuation. I think the main thing to figure out today is whether this CapEx spending is a threat to shareholders at these prices or whether meta is so cheap that it's strong ad business is enough to deliver a great return really regardless of the capital intensity that we end up seeing over the next few years continuing to flow into ai capex and reality labs the good thing about covering one of the american mega caps is there's a lot of research on them out there already it's totally different if you cover a company like Chapters Group, which I did a couple of weeks ago.

1:08:30And if that's the case, you have a lot of research already. You can look at many models from other analysts. What I like to do then is that I look at those models, especially the ones from a couple of years ago, and then compare them to how things actually played out. What's interesting is that especially MetaBalls in 2022 have been completely right about its undervaluation. And yet most of them have been massively wrong about investments and CapEx. Many expected them to come down significantly and for Meta to basically return to becoming an asset-light cash machine. And as we know, that didn't happen.

1:09:02Investments are at all-time highs now. So all these models that went over sometimes eight spreadsheets going into the details of every single little position ultimately couldn't figure out investments, margins, or profits either. So that's kind of why we tend to keep our models simple and something that we often talk about in our deep dives. And it feels great to build these very complex models that predict every single financial position. But at the end of the day, a company like Meta should look cheap even in the simplest models. Otherwise, the opportunity is likely not that great. And the main idea I wanted to test with my model is whether Meta is cheap today, assuming its top-line growth was slow to the low teens and margins in 2030 are essentially the same as today.

1:09:46So this would basically happen if the call options don't work out and you have at least a similar level of investments into AI and the AR glasses and all of the hardware. And this could happen. I mean, the heavy CapEx investments today will flow into depreciation. And this is what will pressure margins in the years to come. We already know this will happen. And if there is no huge payout in three to four years from now, it's just unlikely to have significantly higher margins than today. And in my model, operating income still grows from roughly$80 billion in 2025 to over$135 billion by 2029. it.

1:10:22Again, margins don't expand meaningfully until later in the period. And even then, they only reach 2024 levels. For free cash flow, I'm assuming, I would say a conservative 7 % to 80 % conversion from operating income to free cash flow. I say conservative because in history, it has been higher than that already. And this reflects elevated capex once again, and then working capital needs tied to AI infrastructure. And under those assumptions, free cash flow grows from roughly$45 billion to about$95 billion. So it doubles over the forecasted period. And assuming slight share declines of 1 % to 2%, once again, in line with historical share buybacks that Meta has done, in the next multiple in the mid-20s, a discount rate of 8%, which is what we usually use when we talk about these large cap US companies, this all would imply a fair value of about$700 per share.

1:11:13And that would mean a low double digit return from today's prices, including dividends, technically cleaning our hurdle rate of 12%, but still not as incredibly cheap as Meta has been obviously in 2022. But it sounds like based on your base case, Meta looks roughly fairly valued. What about a more optimistic scenario? Right? We always like to think about the bullish and bear cases here. Yeah. So even in a more optimistic scenario, you don't need to underwrite any outlandish assumptions. Instead of low teens, top line growth, I assume more growth over the next two to three years, leading to a CAGR closer to 20 % in the forecasted period.

1:11:52And if we assume Meta can return to just 45 % operating margins by 2030, you could get a stock worth about$1 ,000 today, even without a high exit multiple as in the base case. So under these assumptions, I still don't expect Reality Labs to break even, not even close. And the additional revenue and margin growth would most likely come from monetizing WhatsApp. and generally if you for example would want to figure out what matter is currently worth if they just shut down the huge investments in for example reality labs it's about 18 billion that they would have more in operating income if you just basically cut down these investments over the next couple of years it's about 50 margins that you would reach so if you want to do an optimistic case and you want to model that you invest significantly less money in the next couple of years into those segments, you should probably model about 2 % margin increases over time to get about 50 % at the end of 2029, 2030.

1:12:47And as somewhat of a closing remark on this pitch, I guess what makes me a bit hesitant is Zuckerberg's stubbornness into these investments in reality labs and AIs. I believe it just is his drive to stay at the forefront of technological development, but it seems kind of desperate at times. I mean, it's as if he knows that Meta needs to expand beyond the family of apps at some point. And until now, investments outside of social media just simply didn't work out well for Meta. And I'm not arguing against my own pitch here. I think Meta will deliver very solid returns from here. And if any of the call options work out, you might see a Google-like rally.

1:13:26The worst case is probably that the investments of the last few years are gone And that matter, after a few years of lower margins, we'll just return to solely printing money through Instagram and Facebook. And honestly, that doesn't sound too bearish to me either. So yeah, I just have the feeling that it will become way more difficult for us this year to make portfolio decisions. I think that's true because now that we have a more established portfolio that we spent all of 2025 building out, we have to contrast these new opportunities with the businesses we've already covered in depth. invested in.

1:14:02And through that lens, I don't know. I'm not sure that this one stands out enough to me yet. On the one hand, I remember thinking that TikTok was going to destroy Facebook and Instagram and for them to turn reels into the business that they have turned it into. I think it's very, very impressive. And I don't want to bet against Zuckerberg, but also if we've learned anything from working in the media business. They said advertising can fluctuate a lot from year to year, even for players as big as Meta. So for me, I think I would probably be more excited to snap up shares on the back of maybe an unexpectedly rough year in advertising than during just a modest pullback after what's been truly an incredible run in the last few years.

1:14:49And I don't know if that's six months or five years from now, but market timing is a bit of a dirty word. And that but that really is just to me what it means to wait for a wide enough margin of safety. And in this case, intuitively, I'm just not sure the margin of safety is wide enough. And for example, the way I think about it is why add a 3 % portfolio position in meta over, say, just adding another 3 % to our existing holding alphabet. bit. And maybe that's kind of a cheeky thing to say, but honestly, when you're talking about two mega caps driven primarily by AI and advertising, I don't know if I see the advantage in having exposure to both as opposed to just doubling down on the one we know the best and have more confidence in.

1:15:34And as I was saying, I don't know when that next ad market pullback will come, but that is probably the type of event where I could see meta shares getting mispriced enough to warrant a full position from us. But otherwise, at current prices, I'm not sure that I could get excited enough about the business, especially with all the virtual reality and AI CapEx and all this other stuff going on. That I would want to make it more than just a tracking position at most. I think it's important to, once again, point out that we are really trying to think long-term here. So perhaps Google is slightly overvalued right now and probably Meta is slightly undervalued right now.

1:16:13But we are thinking about what company we would want to own for the next 10 years. And if I think about Google, and honestly, if the research of Meta has shown me one thing, it's that I definitely want to own Google. It seems that Google, no matter what you look at, what the product is, what the industry is, Google is always there. And it's at the top of almost any product that is either released right now or that will come out in the next couple of years. So yeah, I definitely think that Meta is probably under value right now. And it probably would clear our hurdle rate of 12 % going forward in the next couple of years, but is it significantly better than the companies that we currently own in our portfolio?

1:16:49I'm not so certain about that. I mean, as a general framework for portfolio decisions this year, I don't think it's helpful to frame reallocations as mistakes or short-term thinking because in the early phase of the portfolio, the goal was to get things started. And that meant adding high quality companies as we cover them, knowing full well that over time, we would likely come across businesses that are even higher quality. And that doesn't mean the initial investment was a bad idea or a mistake. It simply reflects the reality of a closed portfolio where no new capital is coming in. And in that setup, every new idea has to, some extent, compete with existing positions.

1:17:28And sometimes that means replacing a very good company with one that we personally believe has an even better long-term risk reward profile, not because the first one was a mistake or it has failed, but because capital is scarce and opportunity costs actually matter. But regarding matter, I think I'm more bullish on the company than you. And maybe this pitch was even slightly more negative because we only focused on the what ifs instead of the fantastic ads business. But I'm quite confident, again, it could clear our 12 % hurdle rate. However, I don't immediately see a position in our portfolio that I would want to swap for matter.

1:18:00I guess we will have to take an even closer look this year at how our portfolio companies perform on an operational level and then compare them to our waitlist companies. And personally, I think that matters far up on our waitlist now. But all right, how about we give the hints for the next episode? Yeah, so actually next week's pitch is another social media company. But it's one I'm guessing most of the audience has never heard of, which sounds a bit antithetical to being a good social media business. But I think you'll see what I mean. And actually, I will add that this is going to be our first foray into the healthcare sector.

1:18:34So if you focus on just those two hints, I think you can probably figure out exactly which company I'm talking about. The healthcare sector is something that a lot of people pointed out to us. And until now, we haven't covered a company there because we thought it's just too complex. But I think the company that you look at next week will be a pretty interesting one. And yeah, I'm pretty excited for it. So I would say I would close it for today with a quote by, of course, who else? Mark Zuckerberg. And he said, move fast and break things. I probably wouldn't recommend that as general life advice, but after listening to many interviews with him lately, I think it's just astonishing how someone who has become one of the richest people on the planet in his 20s still has such a drive to work every day and disrupt everything and is willing to risk on it.

1:19:19But yeah, we are not willing to take the risk with Meta yet. And with that, we hope to see you next Sunday in the next episode. Have a good one. Thanks for listening to TIP. Visit theinvestorspodcast.com for show notes and educational resources.

1:20:01or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice. References to any third-party products, services, or advertisers do not constitute endorsements, and the Investors Podcast Network is not responsible for any claims made by them. Copyright by the Investors Podcast Network. All rights reserved.

1:20:35Thank you.