by elmads

I do not own shares of Meta platforms. This article is for informational purposes only and not a Financial Recommendation

Introduction

I started my value investing journey in 2019, an investment strategy that focuses on the fundamentals of a company. On how to understand how the company makes money, what its businesses or businesses do, its industry where it operates, competitors, management, its advantage from others, its financial health, risks and future growth.

It was hard for me to start this path during the first few months, because I didn’t have any books to read, I didn’t know where to start, but I was very curious and at the same time excited to learn about its approach and philosophies.

It was that curiosity that pushed me to read articles, watch vlogs, look into investing groups in different social media platforms, listen to podcasts and eventually finding good books to read. The problem I encountered during my early parts of my journey was the inaccuracy of information, almost half of the the things I read were false or inaccurate. What I did was to counter check it with different information and sources all over the internet just to make sure if it’s true. I know it wasn’t the best way to learn, but that was my only way of learning back then.

Overtime, I get to see the websites, podcasts, videos and social media groups that are actually legit , the ones that provide accurate educational investment contents. I get to weed out the not so good, the only for the money and the spreading misinformation types.

What I did before was the grapevine learning, where I start from the top, then dig down on each information I get to encounter that I didn’t know yet, up until I can’t find anymore questions to ask. It was finding the end of the grapevine. Once I’m satisfied, reaching the end of the vine, and have understood the whole context of the initial information where I started from. That’s when I would go back from the the top of the vine and continue to learn other things, and repeat the process until I get to understand the general view of it.

It may sound complex, but it isn’t. Let me link to you the LinkedIn blog made by a friend of mine in LinkedIn named Mika Yeap. In his blog, he further explained this method in detail, he calls this approach the “Thin Threads Method”.

Why Some Things Are Impossible to Learn, and How to Learn Them by Mika Yeap

Moving forward, In this blog, I will share to you the very simple ways on how I do my research. The method on how I try to understand a company and its businesses.

I’ll be using Facebook’s parent company, Meta platforms (Ticker Symbol: META) as an example for this article.

Accessing Annual Reports

The most accurate way to access information of a company is directly from their website. Public companies are mandated by the Securities and Exchange Commission to disclose some of the company’s information to the public and to their shareholders. Public companies are owned by the public its investors and shareholders, therefore information should be publicly available for everyone to access and read.

Henceforth, public companies always update their investors with important events, plans, actions and decisions through the investors relation portion of their website. In Meta’s case, it is the “Meta Investors Relations” of their corporate website. https://investor.fb.com/home/default.aspx

I always look around the company’s corporate website first and see what they do, their vision and mission, the people behind the company and also its history.

This is where the “Company Information” will come in handy, as it gives us a quick and general overview of the corporation and its business.

Also, in a company’s website, we will be able to search their offered products and services to the masses.

If you find it hard to locate Meta platform’s “Investor’s Relation”, I’ll show you the way. Our starting point is on Facebook’s sign up and log in page. See slideshow photographs provided below.

Meta Platforms (Ticker: META) is the parent company of the Facebook social media application & website. It is a social media holdings company that also owns Instagram and WhatsApp.

The next questions we should ask is this. How do Meta platforms and its family of applications make money?

How will we get that information? it’s easy, we get it directly from the company’s Annual, Interim and Quarterly Reports. I personally prefer Annual reports, because it has more in depth information about the company than the Interim and Quarterly reports.

Step 1: Starting from Meta Investor Relation webpage, Click “Financials”.

Step 2: Click “Annual Reports”.

Step 3: You’ll be directed to the Annual Reports section. In here look for the most recent annual report. In Meta’s case, the most recent is fiscal year 2021. They placed it in 2022 because that’s when they released the report, but I assure you that it is for fiscal year 2021.

Step 4: Download the report. I always go for the PDF file, but it is up to you which file you would like to download. The contents and information are the same, whichever you choose to download.

Step 5: Once the Annual Report is downloaded. Click open, then you’ll be directed to the first page of the report. Scroll down and look for the “Table of Contents”.

Step 6: Click “Business”. We always start with the business portion of the report. This section further explains what the company does, how they operate and what they sell. Some companies even show the breakdown of their sales per category of their products and services, and sometimes the geographical location.

Step 7: Read. Read. Read.

As you can see, the steps taken here are straightforward. Everyone will be able to know what a specific public company does, provided that the person doing the research has a hardware (e.g. smart phone, laptop, computer, tablet and others) and an internet access. Most public companies have their previous quarterly reports, half year and annual reports archived in their website. Others have a decades worth of reports, while some only have 5 years.

Revenue

Revenue is the top line of the business, it shows the amount of money that a business has generated in given period of time. In and individual employment level, it is our Gross Income. To understand a company, is to understand their revenue first. The following below are the things we should know.

• What they sell
• How much they sell their products or services
• Who are their customers
• How they make money
• What are the revenue stream breakdown

We’ll again use Meta platforms to answer the above questions.

1.) What they sell? they are an advertising company, that sells the rights to advertise products and services in their Family of Applications (Facebook & Instagram). Just think of it as a payment to the company who owns a billboard in New York Times Square, so as to advertise a product or a service. But with Meta platforms, it’s through the digital space via their social media applications.

A small percentage of their revenue is attributed to selling hardware products.

2.) How Much they sell their services? – This is dependent on how much advertising spend an individual, group or business is willing to spend. Meta tracks this through their Average Revenue Per User (ARPU). This is the average total revenue they get from the number of users they have in their family of apps. This can be seen via their Quarterly reports under “Earnings Slides”.

The photograph below was taken from Meta Platform’s 2nd Quarter of 2022 Earnings Report.

3.) Who are their customers? – individuals, groups, businesses (small to large) and government agencies. Basically anyone who wants to use their advertising services through their family of applications.

4.) How they make money? – Their revenue streams come from individuals, groups and businesses who pay them money to be able to advertise their own products and services in Meta’s family of applications (Facebook & Instagram).

5.) What are the revenue stream breakdown? – Firstly, through advertising through their Family of applications.

Secondly, through “Reality Labs” which is not related to their advertising business. It focuses on their hardware products, such as Meta Quest 2, Meta Portal and Ray-Ban Stories.

Too Hard to Understand

One thing about understanding and researching a company is this.

If you can’t understand how they make money, and their revenue breakdown despite reading both their most recent reports and even their previous annual and quarterly reports, just please stop. This means that the company is too hard for you to comprehend.

There are thousands of companies out there that have a business model which is simpler for you to understand.

One of the most important aspects in investing is understanding what you own. If you can’t explain how a business makes money, then you shouldn’t own it, and that’s absolutely fine.

There are industries and companies I don’t force myself to understand as well, like mining corporations. I just really find it hard to comprehend that industry in general. I mostly stick to my circle of competence, on the things that I can fathom, while for those that I cannot, I just put it on what I call “The Too Hard To Understand File”.

“We have three baskets for investing: Yes, No, and Too Tough to Understand”

-Charlie Munger

To Sum It Up

The most important part of understanding a business is turning ourselves into a reader with insatiable curiosity. A reader looking for additional knowledge and ideas to find a wonderful business or businesses where he/she could invest his/her hard-earned money, for the purpose to ride its corporate earnings growth for as long as possible.

An investor and a reader, who takes actions from what he/she learned. A reader that others says even transforms him/herself into an amateur journalist and researcher. A reader where understanding, knowing more and taking actions from those accumulated and future learnings, can lead to an exponential financial growth.

“Investing is where you find a few great companies and then sit on your ass”

-Charlie Munger

See Part 2 – Understanding a Public Company from Scratch – MD&A & Financials—>

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.