Meta Platforms META is set to release its third-quarter earnings report on Oct. 30. Here’s Morningstar’s take on what to look for in Meta’s earnings and stock.
Key Morningstar Metrics for Meta Platforms
Earnings Release Date
- Wednesday, Oct. 30, 2024, after the close of trading
What to Watch for in Meta Platforms’ Q3 Earnings
- Generative AI monetization: The company is investing a lot in gen AI and in-house LLMs. Any discussion about how the company will be able to monetize these investments would be helpful for analysts looking to value the Meta x GenAI opportunity.
- Hardware: There is a lot of hype around Meta’s Rayban glasses. Any further color on this opportunity from the firm’s side would be helpful, especially as we think of Meta’s opportunity beyond digital advertising.
- Digital ads: Digital ad spending (especially from Chinese retailers like Temu and Shein) has helped Meta’s ad revenue grow. At some point, we will likely see a slowdown in this spending, which could impact Meta’s ad business, which remains the company’s cash cow. A material slowdown in the ad market could also impact Meta’s ability to continually invest in newer areas including GenAI/Reality Labs.
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.
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 Renee Kaplan.