Here is how I think about prospective ROIC in terms of an investment thesis:
The goal is to have a differentiated view from the market on capital productivity in the future (because this will dictate future cash flows, which determine PV or intrinsic value today), and I think of the possibilities as falling into these three buckets above. I’ll elaborate on this in a future post and hopefully run through many examples of this thinking as applied to real companies. But as this applies to META, I would think that the bull/bear debate around the stock resides around the 1st bucket above – ROIC Fade vs. No Fade. My reasoning:
No one can deny that META META 572.81 -3.66 -0.63% throws off tons of free cash both before and after very sizable investments via the P&L. Even post the selloff of the stock this year the sellside is still modeling lots of income growth. But there is lots of worry on top of general risk-off stuff right now, and each bear argument touches concerns regarding prospective ROIC in some way:
- Tiktok – Lots of sales will be stolen from FB resulting in possibly lower sales growth, maybe even lower sales, and negative operating leverage as a result. Bad for ROIC.
- Macro/Ad Recession – lower ad spends are bad for META as it now captures a pretty high percentage of the ad market. Negative operating leverage, bad for ROIC.
- Over-investment in Metaverse – What if the metaverse is a bust? No real sales from it and a ton of investment in it – terrible for margins, bad for ROIC.
- Apple iOS Privacy Change – This is an interesting one because the writing was on the wall about the change, everyone saw it coming. The company minimized it and…then it happened. The market is still digesting this – can META work around it so that it’s a speedbump in retrospect, or is it being underestimated and a serious permanent problem. BTW, the book Chaos Monkeys does a great job of explaining how most of the data that makes the META ad platform so effective is coming from OTHER websites and sources, not the META platform. Anyway, this goes to the heart of the capital productivity of the ad platform and the business right now, in the pre-metaverse version of META.
This post is not about valuing META or its attributes as an investment, so I won’t go any further on the company. But suffice it say, ROIC is a big part of the story and I think the buckets above are a useful framework for applying capital productivity thinking to any business.