Is Meta Stock a Buy After Earnings?

Meta Platforms META released its first-quarter earnings report on April 26. Here’s Morningstar’s take on what to think of Meta’s earnings and stock.

Meta Stock at a Glance

• Fair Value Estimate: $278
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Meta’s Q1 Earnings

Meta Platforms’ first-quarter results confirmed our views on Reels monetization, ad conversion improvement, margin potential, and an unharmed network effect moat source. We have increased our revenue projections and continue to expect margin expansion beginning in 2024, pushing our fair value estimate up to $278 per share from $260. While the share price of this wide-moat firm has increased more than 135% from its lows in November 2022, we believe it remains undervalued.

With improvements in ad prices and Reels impressions, the cannibalization of other ads on Instagram will likely end this year or early in 2024, which should further accelerate revenue growth. The Reels feature has also helped increase time spent on Meta apps, which should boost ad demand not only on Reels but also on Stories and Feed.

Looking at ever-concerning Apple data policies, Meta’s on-site ad conversions continue to increase, reducing the company’s dependence on data from Apple and other outside platforms. Meta has also enhanced its ad measurement capability to better handle Apple’s restrictions, lowering hesitancy on the part of advertisers. With regard to the bottom line, excluding restructuring charges, operating margin is likely to approach the high 20s or low 30s this year, with more expansion through 2027.

We commend the firm for shifting its short- and medium-term focus mostly toward increasing efficiency within its family of apps segment, which will help increase the capital available to continue its share repurchases and reinvestment in enhancing features powered by artificial intelligence. At the same time, the firm is also investing in the metaverse, which is its long-term focus.

Fair Value Estimate for Meta

At a 4-star rating, we believe Meta stock is undervalued compared with our fair value estimate.

Our fair value estimate is $278 per share, representing an enterprise value of 14 times our 2023 adjusted EBITDA projection. We have modeled 10% average annual growth over the next five years. As the firm plans to further invest in research and development, content creation, data security, and its virtual/augmented reality offerings (the metaverse), we see average operating margin declining further in 2023, after which it will likely expand as revenue growth accelerates. This growth will be driven primarily by increasing allocation of marketing budgets toward mobile, video, and social network ads. We expect slight growth in 2023 ad revenue (7%) but model 10.2% growth in 2024, assuming an economic rebound and an improvement in Reels monetization. We expect a slowdown in the firm’s operating expense growth in 2023 due to its restructuring efforts, though it should still exceed top-line growth.

Read more about Meta’s fair value estimate.

Economic Moat Rating

We assign Meta a wide moat rating based on network effects around its massive user base and intangible assets, which consist of a vast collection of data users have shared on the company’s 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. Now that Meta has emerged as the clear-cut social-media leader, we believe that its offerings—mainly Facebook, Instagram, Messenger, and WhatsApp—have strengthened its network effects, as all these platforms become more valuable to its users as additional people join and use their services. Besides network effects, Meta has developed additional intangible assets. Facebook has accumulated data about everyone with an account to an extent unlike any other online platform in the world. With access to such data, as well as the billions of photos and videos uploaded by users, the platform continues to enhance itself by offering even more relevant content to its users. The company does not sell the data to ad-tech companies or other third parties.

Read more about Meta’s moat rating.

Risk and Uncertainty

We believe that while barriers to exit may be increasing for Meta’s 3.8 billion users, the risk remains of another disruptive and innovative technology coming onto the scene and luring users away from its apps—most recently, TikTok has looked like such a competitor. We do not expect competition in the form of a substitute for Meta, as most consumers use more than one social network. The firm’s high dependence on user behavior data also represents an environmental, social, and governance risk. Lack of data privacy and security could negatively affect users, as could data misuse. Similar to Alphabet GOOG, Meta faces limitations on the mergers and acquisitions front, as the United States and other countries are attempting to lessen these firms’ dominance in advertising and the overall internet market.

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 online advertising in this space.
• 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 will be severely affected if online advertising stops growing or more advertising dollars shift to competitors like Google or Snapchat SNAP.
• Despite rapid user growth, many of Meta’s customers also belong to other social networks, such as Snapchat or TikTok, so the firm must continually fight to capture a user’s time and engagement.
• 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 Maggie Guidici.

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