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

Meta Platforms META released its second-quarter earnings report on July 31. Here’s Morningstar’s take on Meta’s earnings and stock.

Key Morningstar Metrics for Meta Platforms

• Fair Value Estimate: $450.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Meta Platforms’ Q2 Earnings

• Demand for ad inventory across Meta’s networks remains very strong. Average ad pricing was impressive, increasing 10% year over year, driving 22% revenue growth.
• As with others investing aggressively in AI and cloud infrastructure, Meta provided no indication of a slowdown in spending. The firm tightened its capital spending forecast to the upper end of its previous expectations ($37 billion-$40 billion, rather than $35 billion-$40 billion), and stated that investment growth will be “significant” in 2025 versus this year. Also, in line with what others have said, Meta reiterated that it believes computing capacity can be used for a variety of tasks, with the flexibility to shift wherever the best opportunities emerge.
• The ad business remains extremely profitable. Free cash flow increased nearly 20% to $13.2 billion during the quarter despite an increase in capital investment to $8.2 billion from $6.1 billion a year ago.
• We increased our fair value estimate to $450 per share from $400 based on the resilience of ad revenue growth and the continued operating leverage Meta has shown despite increasing R&D investment. We view the shares as fairly valued. We still think revenue growth will slow sharply in the coming quarter, and any pullback from Asia-based retailers like Temu could cause a negative surprise.

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 $450 per share, which represents 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 (18%), followed by 15% growth in 2025, which assumes reasonably strong economic conditions, especially in the US, 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 and down from the average of 12% displayed over the past five years.

Read more about Meta Platforms’ 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.

Meta has developed additional intangible assets. Facebook has accumulated data about everyone with a Facebook and/or Instagram account. The platform knows what and who its users like and dislike, what topics and news events interest them, and their browsing history on many non-Facebook sites and apps. With access to such data and billions of photos and videos uploaded by its users, Facebook continues to enhance itself by offering even more relevant content.

Read more about Meta Platforms’ moat rating.

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 very strong balance sheet with net cash of $47 billion. The firm generated $71 billion in cash from operations in 2023, 41% higher than the prior year, mainly due to the return of top-line growth and the implementation of cost control policies. While capital investment remains elevated versus prior years, capital spending declined to $27 billion in 2023 from $31 billion the prior year. As a result, free cash flow more than doubled to $44 billion.

Read more about 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 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 data misuse, could push users away from its platforms.

Read more about Meta Platforms’ 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 Renee Kaplan.