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

Meta Platforms META released its first-quarter earnings report on April 24. Here’s Morningstar’s take on Meta’s earnings and the outlook for its stock.

Key Morningstar Metrics for Meta Platforms

• Fair Value Estimate: $400.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Meta Platforms’ Q1 Earnings

• Mark Zuckerberg is extremely excited about artificial intelligence and eager to invest in it. AI should benefit Meta’s core advertising business, allowing for better-targeted ads and more automated ad creation and buying. However, the opportunity to create new revenue streams from AI is far more speculative. Areas like AI assistants that can help businesses communicate with customers and general personal assistants for consumers will likely be highly competitive, with Alphabet GOOGL/GOOG, Microsoft MSFT, Amazon AMZN, and others investing aggressively here.
• The core advertising business remains very strong, with ad volumes growing faster than daily active users (20% versus 7%) and pricing increasing 6% versus the prior year (the best pricing growth in several quarters). With past cost containment efforts, strong ad revenue growth produced strong profitability during the quarter.
• Chinese retailers continue to account for a meaningful portion of the increase in ad demand year over year. Meta didn’t disclose sales to China-based customers during the quarter, but customers based in the Asia-Pacific region accounted for nearly 40% of revenue growth year over year. Meta should lap the ramp-up in Asia-based retailer ad spending in the rest of 2024, especially the second half. Any decision by these firms, like Temu, to pull back on ad spending could significantly hurt growth.
• Our $400 fair value estimate includes an outlook for how aggressively Meta will invest in new technologies. We take a pretty negative view, assuming that research and development spending grows steadily over the next few years and capital investment into data centers remains elevated, without much incremental revenue benefit outside the core social media/ad business. If Meta and Zuckerberg decide to pull back sharply here, the stock could be worth more than we estimate. Ultimately, Meta investors must be comfortable with the firm’s heavy investment in new technologies.

Fair Value Estimate for Meta Stock

With its 2-star rating, we believe Meta’s stock is overvalued compared with our long-term fair value estimate of $400 per share, representing an enterprise value of 11 times our 2024 adjusted EBITDA projection. Meta’s revenue growth will be driven primarily by online advertising and an increasing allocation of online ad dollars toward mobile, video, and social network ads. We expect solid growth in ad revenue during 2024 (17%), followed by 14% growth in 2025, which assumes continuing economic expansion and further increases in Reels monetization.

We expect Meta’s monthly active users to grow about 2% annually over the next five years, mainly due to growth in Asia and the “rest of the world” geographies. We also assume a steady deceleration in overall advertising revenue per user growth to 6% at the end of our five-year forecast from 13% in 2024, down from the average of 12% displayed over the past five years.

Read more about Meta’s fair value estimate.

Economic Moat Rating

We assign Meta a wide moat based on network effects around its massive user base and intangible assets consisting of a vast collection of data users have shared on its various sites and apps. Given its ability to profitably monetize its network via advertising, we think Meta will more likely than not generate excess returns on capital over the next 20 years.

Since it’s the clear-cut social media leader, we believe Meta’s offerings have established strong network effects, whereby all these platforms become more valuable as more people use them. This creates barriers to success for social network upstarts and barriers to exit for users, who might leave behind friends, contacts, pictures, memories, and more by departing to alternative platforms.

Read more about Meta’s economic moat.

Financial Strength

In an industry where continuing investments are required to compete and maintain market leadership, we believe Meta is well-positioned in terms of access to capital. The firm has a strong balance sheet, with net cash of $47 billion. It generated $71 billion cash from operations in 2023, 41% higher than the prior year, mainly due to the return of top-line growth and cost control policies. While capital investment remains elevated versus previous years, capital spending declined to $27 billion in 2023 from $31 billion in 2022. As a result, free cash flow more than doubled to $44 billion.

Meta declared a quarterly $0.50 per share dividend in the first quarter of 2024. The firm likely will also use a portion of its cash to repurchase shares and to remain active on the acquisitions front, although limited by continuing Federal Trade Commission antitrust oversight.

Read more about Meta’s financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Meta is High. While barriers to exit may be increasing for users of Facebook and its family of apps, a disruptive or innovative technology (recently TikTok) could reduce the time they spend on Meta’s apps. Increased usage and engagement on one social network could come at a cost to other social networks, reducing engagement and the potential return on investment for advertisers. Even with Meta’s dominant position in the social network market, its dependence on online advertising exposes it to a lengthy downturn in online ad spending, which could happen during a protracted economic downturn.

The firm’s high dependence on user behavior data also creates an environmental, social, and governance risk. Regulatory agencies worldwide could impose limitations on what user and usage data Meta can compile and how the data can be utilized. Lack of data privacy and security or misuse could push users away from its platforms.

Read more about Meta’s risk and uncertainty.

META Bulls Say

• With more users and usage time than any other social network, Meta provides the largest audience and the most valuable data for social network online advertising.
• Meta’s ad revenue per user is growing, demonstrating the value advertisers see in working with the firm.
• The application of AI technology to Meta’s various offerings, along with the launch of VR products, will increase user engagement, driving further growth in advertising revenue.

META Bears Say

• Meta is currently a one-trick pony, and it will be severely affected if online advertising no longer grows or more advertising dollars shift to other platforms like Google or Snapchat.
• Despite rapid user growth, many of Meta’s customers may also belong to other social networks, such as Snapchat or TikTok. The firm must continually fight to capture a user’s time.
• Regulations could emerge that limit the application and collection of user and usage data, or restrict acquisitions, affecting data utilization and growth.

This article was compiled by Liz Angeles.