Hey guys, it's sasha facebook announced at q4 results last night after markets closed, and it was an absolute disaster. The stock has plummeted by over 22 as i'm recording this video, and i wanted to share my view on what's happening. I will tell you the reasons why i think facebook's share price is tanked and why i think the drop in the share price is warranted. I'll also share my thoughts on why i do not hold a position on facebook and i am not buying in either.

Facebook is a very popular stock and it gets a huge amount of attention on social media, but it just doesn't pass my own risk assessment and i'm going to share with you why that is first, let's talk about what happened last night, facebook published their results and The first big problem were the high level numbers. Their revenue has gone up. It was 33.7 billion dollars in q4, which was 20 up in the same quarter in 2020 and the full year revenue was 37 up for 2021 compared to 2020.. The revenue wasn't a problem, though, because it came in roughly in line with analyst expectations.

The problem was that profitability dropped and that earnings per share were 3.67, which was not only below analyst forecast, but was a 5 drop on the year before. The problem here is that this sharp drop in profitability is looking like, potentially the start of a trend rather than a one-off issue, and that is what's spooking investors, and that is because one of the biggest reasons why profitability for facebook has tanked is because of the New privacy rules introduced by apple on its ios platform. These new rules restrict the ability of apps to gather data and track users compared to before, and those restrictions mean that facebook isn't able to target ads quite as well as they used to because they don't know. Quite as much about you as they used to - and that means that advertisers will pay less for ads - that are less effective.

The concern is that this is only going to get worse, because google is going to begin introducing very similar rules over the next few years. With changes to third-party cookies, but there's another big reason why profitability has dropped, and this one is probably even worse as facebook, instagram and whatsapp revenue is growing. The reality labs part of the business that they report on separately is losing more and more money, and those losses are accelerating. The income from core apps was 15.9 billion dollars in q4, but reality labs in the same quarter went and lost 3.3 billion dollars.

That is an astonishing amount of money to lose, for what is basically at the moment, pretty much is still a pre-production experiment. Reality labs is facebook's virtual reality, division that is focused on this new metaverse and i'm going to talk a lot about the metaverse in just a second. So hang on. First, let's finish with the numbers, because the second big problem with the numbers was facebook's guidance.

Facebook's outlook for q1 for the total revenue was to hit 27 to 29 billion dollars, and that is a big big problem. Q4 already looked like the start of a decline in the rate of growth, but this q1 forecast is only showing a 3 to 11 year-on-year growth, and that is a massive massive stalling signal. And facebook is saying that. The reason is that ad rates are dropping through a whole host of reasons, including global supply chain issues, and these apples changes in terms and conditions, but also facebook is saying that tick tock is eating their lunch.

Without naming tick, tock facebook have launched reels, which is their attempt to literally reel in people with short form mobile format, video. But the problem is that tick tock is still taking away eyeballs at an increasing rate and reels. Don't really make facebook a lot of money. So let's talk about the elephant in the room, the metaverse, because facebook has literally gone all in on the metaverse and pinned its entire future on this one bet.

Facebook has renamed itself as meta in the last few months and if you listen to their earnings call, it is abundantly clear what their focus is right from the very first minute. The only thing they want to talk about is the metaverse. Everything is going to run for the metaverse metaverse, this metaverse, that is the one and only future. We only want to talk about the metaverse.

The whole point of the call is to discuss the metaverse and oh yeah, we'll also mention the results too. Seeing as we're gon na have two things. The quarterly results call, but let's talk about the metaverse for pretty much every minute when we can so as an analyst trying to assess the stock. I get really big alarm bells ringing, my head, and i want to share these concerns with you, because this is a prime example of a stock where the fundamentals don't pass my risk assessment, so i wouldn't even go to the trouble of building some kind of robust Valuation model, the price for the stock is cheap.

Granted, don't get me wrong. It is currently at 251 dollars per share as i'm recording this video. Maybe it's going to drop a lot more through the day. Maybe it'll rebound - i don't know, but the annual earnings per share in 2021 was 13.77.

So it's trading at about 18.2, multiple on ebs at the moment, which is actually pretty amazing in the grand scheme of things for a company that grew its eps by 36. In the last year, some would say that is an absolute steal and it may well prove to be the case that facebook earns its investors a very, very healthy return from here for people buying in at these rates. It is very possible with these numbers, i'm not saying the opposite, but the risk here is very substantial in my book and that risk is the reason why i am not investing facebook's business at the moment essentially has four products plus change. It has facebook, instagram, whatsapp and as platforms, and it also has the metaverse project, which is the one they're reporting on separately.

Facebook is where all the money is made just from using the platforms you can tell that whatsapp and instagram are far far behind in terms of monetization, but here is something odd on slide 11 of their presentation, you can see that the total monthly active user number Across everything is 3.59 billion by the way the total users have flatlined for facebook, and that is another big part of the concern which has caused the share price to tank, because we haven't seen that before. Although you know, you'd expect eventually them to run out of people, because there's only so many people living on the planet so anyway, let's take that 3.59 billion users and then scroll down to the next slide. The average revenue per person is 9.39 and the fine print at the bottom confirms that the word person means monthly active user as per the metric, above so 3.59 billion monthly active users times 9.39, which is the revenue per user, equals 33.7 billion dollars, which is roughly Equal to the total revenue, but about a billion higher than the family of apps revenue, which is what this is apparently referring to now. I think one issue that i have as an analyst is that the data in here and throughout the 10k report file with the sec is just not clear enough for me to be able to genuinely understand as to how the divisions are separated and how they perform Separately to each other, using their own numbers, the family of apps revenue seems to include the revenue from a reality labs number when it suits them, for example, to show higher earnings per user.

But it doesn't include it in other places, and the family of apps data is not split out between facebook, instagram and whatsapp, and i find this a little odd, given how distinct the platforms are. So it kind of doesn't sound great because it sounds like perhaps you're hiding some data when you could easily show this information, but you choose not to, and you naturally wonder how do instagram whatsapp look compared to facebook? Well, they don't really tell you, but on slide 14 you can see that facebook has 2.912 billion monthly active users in q4, facebook being the only platform they show. Specific data for and the global revenue per user for facebook was 11.57 and q4 and then, if you go and multiply those two together, pretty basic 2.912 billion users times 11.57 equals drumroll 33.7 billion dollars. The exact same 33.7 billion dollars interesting right.

So, based on this data, apparently facebook earns all of the money that the entire overall business owns and the rest of the family earn absolutely nothing now. We know that's not true, because instagram does have ads, but it looks like the ad revenue from instagram and this data is being recognized within the facebook business segment for whatever reason, but back to the metaverse. Facebook is putting their entire business as one giant bet on the metaverse coming becoming the big thing that changes absolutely everything and, on the one hand this is how successful companies become even more successful. They push the boundaries all the time, they're, always at the forefront of innovation.

They try to find the next hour for the business so that they can continue growing aggressively. You want new products, new customers, new growth. All of that - and this is apparently what the metaverse is doing, but the problem for me is that facebook's product that work today doesn't align fundamentally with facebook's product that they are trying to rely on tomorrow and that disassociation for me is potentially very very risky insider Published some interesting stats in 2012, when facebook was still relatively new 94 of teenagers in a research survey, had a facebook account in a similar piece of research. In 2021, only 27 percent of 10 000 teenagers used facebook.

Now the companies conducting the research are different. The methodologies are different, blah blah blah. I get it, but this is very, very stark. Young people do not use facebook, and that trend is only increasing.

You can collect some anecdotal evidence yourself just go and ask young people what social media platforms they do and do not use and then ask them what they think of facebook and then, during the course of their answer, count how many times they use the word boomer. So you have two big issues. The first one is that the platform is naturally dying out, even if the headline numbers don't show it yet because of this shift in demographics. We're not seeing this flat line in user numbers overall, and this overall slowdown to the point where it's now flatlining could just be the point of inflection, because if young people are not using the platform and more and more of them are not using the platform every Year then, over the next decade, there's a very serious risk of user numbers doing a myspace.

It might seem ridiculous now as an assertion, but social media is a very brutal and very fast-paced industry. What was cool and something that everyone used five years ago can very very quickly become completely obsolete and totally irrelevant. This space is developing so fast that there doesn't have to be an issue with the product at all. Someone else can just come up with a better product and send you into irrelevance overnight.

Instagram and whatsapp are used a lot more by young people, but it seems that facebook can't figure out how to properly monetize those platforms other than by using your data to better target ads to you and this new data. Privacy and data sharing initiative coming in from apple and google are naturally going to smash that to pieces over time as well, so staring at this risk. Facebook has to do something because i am sure they understand this far better than i do, because if facebook doesn't and the numbers do start dipping that spiral down can become a very, very bad, self-fulfilling prophecy, so facebook have decided to do this metaverse. The hope here is that people use this new, virtual and augmented reality environment as some kind of communication and information platform of sorts, and i know that a lot of people are excited by this, but looking at it as an analyst, i just don't see the evidence For there being the sort of need for this at the sort of scale that everyone is projecting, i am not seeing which particular problems are necessarily being solved through this project or which specific current use.

Cases in communication and information distribution become fundamentally simpler, better faster easier. I mean i know, i know i am a boomer and i completely don't know what i'm talking about, and all of that you know feel free to write that in the comments. But let me tell you that i just don't see people talking to other people through wearing a giant virtual reality headset as becoming the default way. The predominant way, the highly popular way of communicating that will replace the significantly significant chunk of just you know.

Regular video calls, for example, i do not see people in an office using this method and i do not see mass adoption as a replacement for current communication information sharing channels. Sure there will be an enthusiast crowd, there will be applications, there are gaming applications and there's going to be a large number of hardcore fans. I am sure that that is going to happen, but we're assessing one of the biggest companies in the world, placing all of its bets on this one move sure they could pivot it and find the niche applications that provide interesting solutions or improvements to the way we Interact with others in ways that we haven't seen yet, but do i think that any significant number of their 3.6 billion users will begin buying up property or trading nfts or any of the other nonsense in this new facebook metaverse that is going to make them become A multi-trillion dollar business in terms of growth. It is current guys i do not.

I am sorry, but i just do not see the numbers that support that theory the company's taking a huge gamble that has somewhat little analytical support. In my opinion, and at the same time, their core business is stalling at an incredibly fast rate, with a very real risk of entering a significant downtrend, and that is why i do not hold a position in facebook. If you found this video useful, please don't forget to smash the like button for the youtube algorithm. Thank you so much for watching.

I really really appreciate it and, as always i'll see you guys later, you.