Meta Platforms META is set to release its fourth-quarter earnings on Jan. 29. Here’s Morningstar’s take on what to look for in Metas’s earnings and stock.
Key Morningstar Metrics for Meta
Earnings Release Date
- Wednesday, Jan. 29, 2025, after the close of trading
What to Watch for in Meta’s Q4 Earnings
- GenAI monetization. Last quarter, we got some useful commentary on how GenAI stands to improve ad targeting and content creation. More commentary on this would be instructive as we consider future ad growth.
- Capex plans: With the fourth-quarter earnings, we will get a better sense of how the firm is thinking about capex going forward. This is useful as we think about the firm’s cash flow generation and future margins.
- Content moderation: We want to see how management is thinking about changes in its content moderation policy. These two factors could protect margins as elevated capex (and subsequent depreciation of AI servers) puts pressure on margins. Relatedly, we want to see how management is thinking about the European regulators, and how the firm’s new moderation policies may not comply with the EU’s Digital Services Act. The firm will likely require substantial US government support as it figures out a working arrangement with European regulators.
- Workforce cuts: We are looking for commentary on whether the 5% workforce reduction is a first step in more reductions as the firm shaves off fat from its organization and uses AI tools to replace certain roles.
Fair Value Estimate for Meta
With its 3-star rating, we believe Meta’s stock is fairly valued compared with our long-term fair value estimate of $560 per share, which represents an enterprise value of 13 times our 2024 adjusted EBITDA projection.
We forecast Meta’s sales growing at a 12% compound annual growth rate for the next five years, spearheaded primarily by an increase in average revenue per user, with user growth also chipping in.
While we expect advertising sales from North America and Europe to grow steadily, we believe increasingly affluent and growing middle classes in Asia, Africa, and the Middle East will allow Meta to improve its ad monetization in those regions, lifting its overall top line.
Read more about Meta Platforms’ fair value estimate.
Economic Moat Rating
We believe Meta merits a wide economic moat rating due to its intangible assets and the potent network effect around its family of apps. While the firm’s Reality Labs segment continues to hemorrhage cash, we believe the FoA’s strong competitive advantages will likely allow the firm to generate returns over its cost of capital over the next two decades.
Meta’s FoA segment includes revenue from its social media applications including Facebook, Instagram, WhatsApp, and Messenger. The firm’s dominance in social media is evidenced by its four primary applications constituting four of the six most popular social media applications globally. Also, Meta’s scale in the social media business is staggering. Almost 4 billion people use at least one of its applications every month. According to various estimates, a little more than 5 billion people worldwide have access to the internet, implying that around 75% of them use Meta’s applications.
The vast majority of this massive base uses these applications free of charge. Instead of paying Meta a subscription fee, they constitute an audience it can advertise to. Meta can accumulate user data, such as demographic information, likes/dislikes, and topics of interest, to feed into its advertising engine, which lets advertisers target ads on Meta’s properties.
Read more about Meta Platforms’ economic moat.
Financial Strength
We view Meta’s financial position as rock solid. The firm closed out fiscal 2023 with cash and cash equivalents of $65 billion, more than offsetting its debt balance of $18 billion.
While the firm’s investments in AI stand to increase its capital expenditure considerably over the next few years, the firm’s advertising business remains a cash-generating machine, churning out tens of billions of dollars of free cash flow on an annual cadence.
Read more about Meta Platforms’ financial strength.
Risk and Uncertainty
We assign Meta an Uncertainty Rating of High. We believe Meta’s investments in unprofitable ventures such as generative AI and Reality Labs add a layer of uncertainty around its business, even as its large and stable advertising business continues to generate substantial cash flows in our forecast.
As we look ahead, we believe Meta’s considerable scale and intangible assets, such as its ad-targeting algorithms, will most likely enable the firm to maintain its dominance in the social media application space. While there are antitrust concerns around Meta’s business, with US antitrust regulators pursuing a monopoly case against the firm, we view an often-hypothesized breakup of Meta’s applications into separate businesses as unlikely.
Read more about Metas Platforms’ risk and uncertainty.
META Bulls Say
- Meta’s core advertising business has benefited greatly through improved ad targeting and content recommendation algorithms as well as a secular increase in digital advertising spending.
- Meta’s scale, with the majority of the world’s internet-connected users accessing its applications, lets it access high-quality user data, which the firm can package and sell to advertisers.
- The firm has an opportunity to drive more ad inventory growth, leveraging new products such as Threads while improving its monetization of ads on more nascent features such as Stories and Reels.
META Bears Say
- Meta’s investments in Reality Labs and generative AI stand to lose the firm billions of dollars annually, taking some of the shine off its overall business.
- The firm has a monopoly case against it in the United States, which could potentially force it to break up, severing some of the scale advantages it has built up over time.
- Meta has disproportionately benefited from increased ad spending by Chinese retailers like Temu and Shein. A slowdown in spending by these firms could hit Meta’s growth.
This article was compiled by Aman Dagra.