Mohnish Pabrai's Analysis of Meta Stock... An Easy Double?

I think the current valuation is very compelling. I don't think one needs to even understand what they would do with Reality Labs and all of that. I think make a simple bet to double your money in two or three years. I think that's a pretty low-risk bet. There's no guarantees in this world, but I think there's a good chance you can get a double in two or three years or less.

And then in the meantime, you get the popcorn, watch the movie, put a lot of butter in the popcorn. And if there are things starting to pop, you can say, "Okay, I'll stay on for two or three more years and see if I can get another double."

That right there is Monash probably discussing his thoughts on Meta. Of course, Meta has recently fallen pretty significantly in terms of stock price on the back of their Q4 2021 earnings report. Luckily for us value investors, Monish sat down recently with Divya Narendra for a whole hour just to discuss the future of Meta's ad business, the metaverse business, and also the current valuation.

Now, unfortunately, the interview was put up as an unlisted YouTube video, which means that you need to have access to the URL to be able to watch it. But I found the link, so if you're interested in watching the whole thing, I'll have it linked down in the description below, and I definitely recommend you check it out. But in this video, I just wanted to pull the most important clips and summarize what the two were talking about because they raised some really interesting points.

But with that said, let's start with the headline clip that you're probably seeing all around the YouTube space at the moment. Monish Prabhai believes that Meta, at the current market cap, is an easy double in two or three years.

"My situation when I look at Facebook is that I see a company which is that revenue is not going anywhere; their cash flows are not going anywhere. I think those are pretty solid. I think the user base is pretty solid. So if I were to look at Facebook, I would say that even with five or ten percent annual growth, which doesn't really seem like a big leap for them to get to, the stock ought to be a double at current interest rates. So I don't have any issue with saying that, you know, Meta in two or three years is an easy double. I think that's a reasonable bet."

When we look beyond that, you know, if you're looking for something more than a 2x, I tend to be skeptical because the way my mind works, everything related to Meta is an option I'm not willing to pay for. So whatever they're spending on Meta and whatever they're claiming, in my opinion, I don't think Facebook themselves understand what Meta is.

I think the big point here is that you don't need to believe in the metaverse to own the stock because the core business is trading at such a huge discount to the market that you can own that at, you know, I mean, as you said, like we're talking about something approaching 10 times earnings. Like, that's crazy.

Well, I have to say, I've never heard Monish talk like this in an interview before, but I kind of like it. In his opinion, at the current valuation of around 560 billion, he believes that just the ad business will give investors a fairly handsome return across the next few years. But it was interesting to hear that he isn't particularly excited about the metaverse side of the business. In fact, he says he views the metaverse side of the business as kind of an additional layer that he's not willing to pay for.

And this is where the discussion got really interesting because Monish went on to start discussing why he thinks the metaverse will not see widespread adoption anytime soon, and Divya had some really interesting opposing thoughts.

"But could like a Twitter or could any of these companies, like do they have the firepower to develop the tech? And we're talking about sound haptics, obviously the 3D kind of immersive experience into a form factor that's small enough to be adopted by, you know, hundreds of millions of people or billions of people, that's really hard. The form factor was a huge problem for Google Glass. Like, that's one of the main reasons that failed. Obviously, the technology was where it was worse back then. But when you think about what v2, v3, v4 of AR glasses is going and when you think that these glasses are in a form factor that is already iconic, right? So when they partnered with Ray-Ban or Exotica, they implanted all of this tech into the Wayfarer, which is the most iconic form factor of any sunglass in the history of sunglasses, you're not sacrificing aesthetics when you purchase that product."

"You just kind of think through, okay, in a couple years like what that next version of that product is going to look like. And then you think about, like, who's in a position to develop that? Like, it's not that many people, right? I mean, they spent over 10 billion dollars last year on VR, AR, and everything in Reality Labs. How many companies are in a position to do that and still have 35 to 40 operating margins on a consolidated basis? Not that many."

I think Divya raises a really good point here. The development of the next form factor is going to take a lot of R&D dollars, and so far Facebook is the only one stepping up to the plate to actually develop that. It may take them multiple generations, but Divya is of the belief that they will get there. You know, Google Glass was just too early and too clunky, so it ended up failing. But the new Facebook Ray-Ban glasses, they look just like Ray-Bans.

Now, that might still not be the best product, but give it another five years of tinkering and billions of dollars of funding, what does that grow into? It very well could grow into a cheap mass-market product that enables a really good AR and VR metaverse experience.

So I find that argument quite compelling. At the moment, as I said, Facebook are the only ones really stepping up and investing in the AR and VR technology that looks like it will become the device form factor for the metaverse. But no doubt, this is a big bet for Meta, and that's Monish's second point as to why he prefers other businesses because Facebook are kind of going all-in on this one new business.

"When I look at a business like Amazon, if I look at the large Chinese tech and the large U.S. tech, Facebook, Alphabet, Amazon, Microsoft, Tencent, and Alibaba, there are only two of these— that's Amazon and Tencent— that are really off the charts on capital allocation, the Bezos approach. And on the other hand, Amazon is an extremely innovative company. They've gone after one vertical after another and killed it. And the way Amazon does it is they don't make one large bet. They did not bet everything on AWS. AWS was a small Mickey Mouse project on the side, and as it started to get traction, they started to put more resources behind it. They tried to keep it under the covers for a long time."

"But if you look at the Fire Phone, for example, it failed, but Amazon put, you know, 100, 200 million behind it pragmatically. They saw, okay, this is not working, we're going to move on. They have a lot of failures, but I don't know of any Amazon failure that absorbed meaningful amounts of capital relative to their scale. When I look at Facebook, particularly Meta, it's going all-in on one bet, which is the exact opposite of what Bezos does. Bezos never went all-in. He only went all-in on one bed right at the beginning on books and then very quickly started diversifying those bets and went from there."

"So from my point of view, I cannot give credit to Meta to take VR mainstream. The gamers will go for it, the early adopters will go for it, a lot of cool factors on that front. But for them to go from 10 million to a billion devices, that is a massively, very big leap. So all I can do is I can say, okay, I know it's cheap, I know getting my double is low risk, but then let me go to three years. As the 10 million number move to 100 million, what are the next versions looking like? Are the non-gamers buying this? Is the housewife next door, is she buying?"

So Monish is essentially saying, because it's a singular bet from Facebook that comes second to their ad business, as a value investor, it's almost worthwhile playing conservatively and not even thinking about the metaverse from an investment point of view. It's a different model to an Amazon that will try and spawn 10 ideas and then pump money into the one that actually shows the most promise. Zuckerberg has decided that the second big project for Facebook will be the metaverse, so unlike Amazon that has already tested 10 smaller options and is backing the best one, Mark just said metaverse, "Let's do that."

And of course, that may not work, meaning Facebook remains just as an ads business. So from a value investing approach, simply treat Reality Labs as an expense that will just keep annoying the balance sheet year after year. Monish's thinking is just forget about the future metaverse development, go back to the ads business, and see if you can buy that business cheap enough.

If the only thing you get is the stable ads business, then if you can do that, you essentially get anything related to the metaverse for free. But it doesn't have to come true just to make your investment work out.

"I think Meta is in a place where it can attract a very different set of investors who would have never looked at the stock in the past. I think the current valuation is very compelling. I don't think one needs to even understand what they would do with Reality Labs. The way I would look at it is that Meta is a call option, and that call option, from an investor point of view, should come for free. And today, it is coming for free to me."

"I think if you're an investor looking for a double in two to three years, which is really like, you know, 25 to 35 annualized returns, which is really good, I think this is a decent bet with relatively low downside. And then in the meantime, you get the popcorn, watch the movie, put a lot of butter in the popcorn. And if there are things starting to pop, you can say, 'Okay, I'll stay on for two or three more years and see if I can get another double.' So that makes sense if you can buy it cheap enough now for the ads business. And if things don't work out with the metaverse, oh well, but you'll probably still make a healthy return. And then if the metaverse development does take off, then great, let's see where this thing goes."

"You know, we've held it for three years, we've made a good return, and we can keep holding it." Clearly, Monish thinks Meta is now at a market cap where you can take that approach. You can do that, and I find that really interesting.

But overall, guys, they are Monash Prabhai's thoughts on Meta, and honestly, this selection of clips really was just scratching the surface of what they were talking about. So I really would encourage you, if you've got the time, go and check out the full interview. They also discussed stuff like Facebook probably not even needing any more user growth from here to continue to grow their cash flows. They talked about how the metaverse hardware-software flywheel will probably spin up.

They talked about Elon Musk for a fair bit, which was kind of interesting. Overall, it was actually just a really good discussion, and I really enjoyed it. Leave a like if you did enjoy it or if you found it useful. Subscribe to the channel if you've not done so already. Be interested in checking out profitable links down in the description below: new money clips, new money Patreon— they're also linked down in the description below.

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