The Long and Short
Lower costs should improve margins, cash flow at Meta
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
After a difficult 2022, Meta Platforms Inc. (META, A1/AA-) unveiled plans for the current year, deeming it the “Year of Efficiency”. Management will focus on becoming a nimbler organization, which will include further reducing overhead and fostering faster decision making. In a departure from previous years, META looks to vastly improve productivity in order to bring down the overall operating cost structure of the business. Management’s historically conservative financial policies means META is armed with a strong balance sheet, setting the stage to return EBITDA margins to pre-pandemic levels. Free cash flow generation will benefit from reduced capital spending surrounding its new efficiency measures.
With the single-A Media sector only containing two credits, The Walt Disney Company (DIS – A2/BBB+ (p)/A-) and META, we are highlighting the trading differential between the two. While DIS and META trade relatively in-line with each other in the front end of the curve, the differential in the long end is roughly 40 bp. This should collapse as META executes its transformation and margins and cash flow are restored to historical levels.
Exhibit 1. Single-A Media Curve
Source: Bloomberg TRACE; APS
“Year of Efficiency” to Reduce Operating and Capital Spend
META closed out 2022 with a workforce reduction of ~13%, a facilities consolidation project and a new data center design. However, management noted on its earnings call that this was the just the beginning of its efficiency focus. The data center design will reduce its construction spend as the new data center architecture can support both AI and non-AI workloads. META is also now looking to flatten its organizational structure further with the removal of some middle management layers. As part of the restructuring, the company noted that they will look to utilize AI tools that will support increased productivity for engineers, thereby enabling further staff reductions. Additionally, management will be re-evaluating all current projects and look to cut those that are underperforming or no longer deemed crucial for the development and growth of the company’s two major technology verticals, AI and the Metaverse. That said, META lowered its 2023 capital expenditure guidance from a range of $34 billion-$37 billion to the $30 billion-$33 billion area, while reducing operating expenditure guidance by roughly $5 billion.
Strong Cash Position and Credit Metrics
META benefits from a very strong balance sheet, underscored by a sizeable net cash position. META ended 2022 with cash on hand of $40.7 billion relative to $9.9 billion of total debt, translating to a net cash position of $30.8 billion. This compares favorably to its media peer DIS, who ended fiscal 2022 with cash on hand of $11.6 billion, relative to $48.4 billion of total debt. META’s leverage metric remains well below a turn, as it ended the year with total debt leverage of 0.2x. Despite some improvement to DIS’ leverage this year, total leverage remains high for the current ratings at 3.5x. We note that META’s total leverage is more than two turns lower that DIS’ net leverage of 2.6x.
Exhibit 2. META vs. DIS Balance Sheet and Credit Metrics Comparison
Source: Company Reports; Bloomberg; APS
No Near-Term Funding Needs
META’s debt maturity profile is also very manageable with no debt maturing until August 2027. While META tapped the debt market twice last year, the capital structure remains small with only four public debt issues. DIS, on the other hand, has 140 debt issues outstanding and just over $14 billion of debt maturing through 2027. We believe META’s strong balance sheet provides for good financial flexibility to execute its efficiency measures, with no maturities to refinance and no funding needs required for any cash outlays associated with the restructuring. Additionally, reductions in operating and capital spend provides for stronger free cash flow generation, which will help to support shareholder remuneration. META has just over $50 billion of authorization under its share repurchase program, as the company announced a $40 billion increase to the program with its earnings release.
Ad Revenues Staging a Comeback
Despite a muted advertising revenue environment across the media sector, META has seen considerable growth with its click to message ad product. As one of their fastest growing advertising products, click to message ads have now hit a $10 billion revenue run rate. The growth is helping to drive incremental demand, as more than half of click to message advertisers are exclusively using META’s platforms. META credits this to its AI investments which have made it easier for advertisers to both develop and deliver more relevant and engaging ads. This has grown the conversion rate by more than 20% in the last quarter alone. When coupled with a declining cost per acquisition rate, this has translated to higher ROIs on advertising spend.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
