META 572.81 -3.66 -0.63% is a good starting point for showing an ROIC calculated for an actual company because it’s so simple. Below are the numbers I got for 2021 and 2022:
| Year | 2020 | 2021 |
|---|---|---|
| ROIC | 48.8 | 58.1 |
| ROIC w/out Goodwill | 67.8 | 76.1 |
Below I have embedded the excel workbook I used to calculate these numbers. Note there are 3 tabs – the first is ROIC Calculation which shows how I got to the numerator and denominator (using both operating and financing approaches for the latter) to get to the ROIC result and then two other tabs for the underlying income statement and balance sheet data. By tapping on the two small stacked windows in the bottom right of the mini excel screen below you can expand the excel workbook so that you can see it in its entirety like you are in the excel app – this makes viewing and understanding this much easier.
Quick Thoughts On Meta’s ROIC
Here are some basic observations, which are the kinds of things you should be thinking about when running through ROIC for a stock:
- Cash – Note that cash (including marketable securities) comprises a pretty large percentage of total assets. If one were to not strip out non-operating cash for META (I did) invested capital would be significantly higher, lowering ROIC. The ROIC would still be high in absolute terms, but it would misrepresent the capital productivity of the business, in my opinion.
- Stock-Based Comp – The company breaks out the % of expense items that are paid in stock. I think of SBC as a cash expense, so I did not adjust for this in calculating ROIC.
- Operating Lease – Note this line item in the income statement. I did not adjust for this in the ROIC calculation because…I am lazy? See a great discussion of how to do this here.
- META has a killer high ROIC, and it’s even higher with goodwill excluded. Remember the previous blog post that showed the average ROIC for the S&P 500 as being high single digits. At least in the last three years, META is crushing that. If META has a decent runway to reinvest the cash it generates at similar returns over many more years and it holds some semblance of a terminal value, it will have to appreciate at multiples of what the S&P 500 does – that’s math, not opinion. Of course, the poor recent performance of the stock means there is skepticism about that. But if you exclude Goodwill, in recent years this business returns the majority of its invested capital every…single…year.
- How’s it doing it? It’s that magical combo of low asset intensity and a lot of operating leverage via the economics of the ad platform, which is the engine of the returns. Operating margins are up despite a lot of investment – look at the growth of R&D 2019 through 2021. Sellside has R&D going to $25B+ in 2022 from the already high $17B in 2021 (including SBC). Incredible. Can you spell M-E-T-A-V-E-R-S-E? Since much/all of these costs represent investment in future (potential) benefits of or revenue from META’s metaverse offerings and other products like WhatsApp and the abandoned Diem, maybe they should be capitalized for purposes of calculating ROIC. An important topic for another blog post.
- Compare META’s 2021 revenue ($117B), operating income ($47B) and Total Assets ($166B) to its first full year as a public company (2013): $8B, $3B, and $18B. Interestingly the company’s ROIC for 2013 was already about 19%. This is a business that had strong operating margins early on as a public company, and Zuckerberg has often highlighted this as a priority. So much for mean reverting ROICs, at least over the last 9 years.
- Look at the META share count. This is not directly related to ROIC but I can’t help flagging it – they keep a lid on the share count, which is very unusual for big tech and something that drives me absolutely crazy about the others. Companies like Block have decided to give the company to employees over time, because they are more important constituents than shareholders I guess, not to mention the fact that SBC programs always include grants to management too, so they are paying themselves. Look at the share count explosion at BLOC since the IPO in 2015 – up more than 50%.
- Of course, the trillion-dollar question is, will a strong historical ROIC be sustained, will it improve, or will it decline? Being right about this is where the value is created as an investor. A (very?) well-trained monkey could do the math outlined above on the historical ROI and stop there.
- The rationale for calculating Meta’s ROIC without including goodwill is discussed here.