After Earnings, Is Meta Stock a Buy, a Sell, or Fairly Valued?

Meta Platforms META released its third-quarter earnings report on Oct. 30. Here’s Morningstar’s take on Meta’s earnings and stock.

Key Morningstar Metrics for Meta Platforms

What We Thought of Meta’s Q3 Earnings

• Meta reported strong third-quarter financial results, with revenue growing 19% year over year to $41 billion. Profitability also improved, with operating margins expanding 300 basis points from a year ago to 43%. Capital expenditures remain elevated due to heavy artificial intelligence investment.
• Meta’s advertising juggernaut produced another solid quarter, with ad impressions and average price per ad both up year over year. Management also called out its investments in generative AI as value-accretive for improving user engagement and monetization. Ad impressions increased by 7% and the average price per ad increased by 11% year over year. The firm saw broad-based strength, with ad impressions and prices growing across geographies. More than 500 million people are using Meta’s chat assistant within its applications. We were encouraged to see management call out improvements in user engagement stemming from increased usage of the chat assistant.
• We maintain our $560 fair value estimate for Meta, and we continue to view the firm as well positioned to leverage AI to improve user engagement and user monetization. With shares trading slightly down after hours, we view them as fairly valued. While Meta’s investments in GenAI have raised eyebrows, we reiterate our belief that their true value will manifest itself in the firm’s core advertising product. We believe ad campaigns on Meta can derive greater value using GenAI tools, which the company can capture via its potent monetization engine. At the same time, we expect near-term margins to remain pressured as Meta’s capital expenditures flow through its income statement as depreciation charges and it continues to spend heavily on AI talent.

Fair Value Estimate for Meta Platforms

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.

Drilling deeper, we believe Meta has a strong monetization opportunity ahead of it in Asia and the rest of the world. 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’ moat rating.

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. At the same time, there is headline risk that the firm faces as the case moves through the courts with a trial likely starting in 2025.

Beyond advertising, Meta’s investments in Reality Labs and generative AI, primarily via its Llama LLM, add uncertainty to the firm’s overall business. Along with losing Meta billions of dollars every year, a profitable monetization strategy for both investments remains elusive. While the firm has shown a panache of proving investors and analysts wrong with large business decisions in the past, we remain uncertain about the long-term value accretion these investments stand to provide Meta.

Read more about Meta 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 Frank Lee.