The best companies are always looking for ways to improve and expand their impact. But when they grow beyond their original name, and change it to reflect that, it can be hard for investors to adjust. The name change may signify that a company is moving in a different direction and could be enough of a reason to take a step back and reexamine your investment thesis.
When the companies formerly known as Facebook, Priceline, and Square changed what they call themselves, three longtime Fool contributors weren't happy. Despite ill feelings about the new names, Meta Platforms (FB +1.81%), Booking Holdings (BKNG +4.04%), and Block (SQ +3.77%) are three tech companies they'd buy today.
Image source: Getty Images.
Meta Platforms: The company formerly known as Facebook
Danny Vena (Meta Platforms): Investors were blindsided late last year when social media titan Facebook announced it would change its name to Meta Platforms. The rebrand was meant to reflect the company's growing emphasis of "bringing the metaverse to life," and to advise shareholders the company was going "all-in" on the metaverse. CEO Mark Zuckerberg believes that more than 1 billion people could be in the virtual world called the metaverse in 10 years.
Social media and late night comedians immediately erupted in scorn and ridicule at the development. One Twitter user reckoned that Facebook chose Meta because "Meh" was taken. Another concluded that telling people you're on Meta sounds like you're taking a drug. Perhaps the most creative dig came from Wendy's, which said it was changing its name to Meat.
As disliked as its new moniker may be, there are still plenty of reasons to invest in Meta Platforms.
NASDAQ: FB
Key Data Points
At the head of that list is the company's unrivaled user base, which numbered 2.82 billion daily across its family of products -- which includes Facebook, Instagram, WhatsApp, and Messenger. On a monthly basis, roughly 3.59 billion used its services.
That audience has helped Meta become one of the largest digital advertisers on the planet, raking in an estimated 15% of all digital ad spending worldwide, behind only Alphabet. That puts Meta in an enviable position to continue to capture market share, as global ad spending rose to $763 billion in 2021 and is expected to top $1 trillion by 2025 -- an estimate that could well be conservative.
There are other opportunities Meta Platforms could tap to fuel its growth. Meta invested $10 billion last year to develop gateway technologies that could lead to greater profits as the metaverse takes shape.
The Oculus virtual reality headset accounted for roughly 52% of the market last year -- more than all other competitors combined. Meta also partnered with Ray-Ban to develop smart eyewear, which has built-in cameras and headphone, letting wearers make calls, shoot photos and video, and listen to music. Additionally, Meta's research and development arm, Facebook Reality Labs, has created "haptic gloves" that give users the sensation of "feeling" virtual objects.
There are risks, however. In the fourth quarter, Meta's revenue of $33.7 billion increased 20% year over year, as the company faced headwinds created by Apple's decision to enforce stricter privacy policies. At the same time, net income of $10.3 billion declined by 8% year over year. Investor fears over the decline have sent the stock down by 44% as of this writing. These challenges, however, didn't stop Meta from generating more than $57 billion in operating cash flow and free cash flow of $38 billion for the year.
Given the company's heavy investment in the future, pole position in social media, and strong cash generation, investors should consider a position in Meta Platforms stock -- even if they hate the new name.
Image source: Getty images.
Booking Holdings: This travel stock cruised into stagnation
Will Healy (Booking Holdings): It seems like people haven't taken to the February 2018 debut of the name Booking Holdings. According to Google Trends, Priceline.com draws 75 times as much attention on Google as Booking Holdings four years after the name change.
Also, as Priceline, the stock rose from a split-adjusted level of around $6 per share during the dot-com bust to just over $1,900 per share on the day before the name-change announcement. In the four years since the name change, the stock has only risen by 18%, with most of its gains earned in the last 12 months.
Much of the decline came as COVID-19-related restrictions decimated the travel industry and, as society emerges from the lockdowns, the stage is set to spark massive growth in Booking stock.
NASDAQ: BKNG
Key Data Points
In 2021, Booking Holdings reported revenue of just under $11 billion, a 61% increase compared to 2020. This led to a profit of almost $1.2 billion, an improvement from the $59 million earned in 2020.
Moreover, analysts estimate it can bring in more than $16 billion in revenue in 2022 and $18.9 billion in 2023, increases of 46% and 18%, respectively. This implies a forward P/E ratio of about 25 under current estimates.
At over $2,200 per share, Booking Holdings is the seventh-most expensive ticker in terms of nominal price. Hence investors may want to put it on a stock-split watch, as such a move could bring much-needed attention if it ever happens.
In the end, the name change may not have served Booking Holdings well. However, the recovering financials -- and hopes for a stock split -- may mean that investors should consider buying this stock as if it were still called Priceline.
Image source: Square.
Block: Expanding its role in economic empowerment
Brian Withers (Block): I'll have to admit when the company formerly known as Square announced its name change to Block, I was less than enthusiastic. The corporate announcement in December 2021 stated the name change was to recognize that the company has moved beyond its original business and that "Square" was now "synonymous with the company's Seller business." Since its founding, the company has added Cash App, Tidal, and TBD54566975 as new businesses, and this new name signifies "an overarching ecosystem of many businesses united by their purpose of economic empowerment, and serves many people -- individuals, artists, fans, developers, and sellers."
OK, I get it, but I'm still not super pumped about the new name. Regardless, I think investors may not realize that this company is still heavily grounded in its original Square and more recent Cash App business. The table below shows the last three years of revenue for each of its segments.
|
Metric |
2019** |
2020 |
2021 |
2021 YOY change |
2-Year Change |
|---|---|---|---|---|---|
|
Seller/Square revenue |
$3.46 billion |
$3.53 billion |
$5.19 billion |
47% |
50% |
|
Cash app revenue |
$0.59 billion |
$1.40 billion |
$2.30 billion |
64% |
290% |
|
Bitcoin revenue* |
$0.52 billion |
$4.57 billion |
$10.01 billion |
119% |
1,825% |
|
Other revenue |
N/A |
N/A |
$0.15 billion |
N/A |
N/A |
Data source: Company's 2021 10K filing. Calculations by author. *Bitcoin revenue is separated from Cash app revenue for clarity. **Caviar revenue is excluded from 2019.
Although Bitcoin is the majority of the company's revenue, in 2021 it only accounted for $217 million of gross profit, less than 5% of the total gross profit that year. When you subtract the $71 million of Bitcoin impairment losses, the overall impact of Bitcoin becomes even smaller. The tiny $0.15 billion in other revenue is made up of subscription fees, most likely from the Tidal music service, since the TBD platform results are "immaterial" for 2021. Also, note that the Afterpay acquisition closed at the end of January and would not be included in the 2021 results above.
NYSE: SQ
Key Data Points
Going forward, the company plans to invest $140 million (or around 2% to 3% of total investments) in the coming year on "our four emerging initiatives, TIDAL, TBD, the hardware wallet, and Bitcoin mining." So the original Square segment and Cash App will continue to carry the company's gross profit and bottom line for the foreseeable future. As a shareholder, I'm happy to see that the company isn't abandoning its core businesses, but looking to expand its addressable market with focused investments in these new initiatives.
The company is holding an Investor Day on May 18 in which it will update analysts and investors on its plans for the future. For now, I'm a happy Square, er, sorry, Block shareholder. The future looks bright for its core businesses and I would recommend this software specialist as a longtime holding for investors interested in tools that provide economic empowerment for its customers.
