Meta Earnings: Reels Monetization Becoming a Reality While Network Effect Remains Intact

Meta Platforms Stock at a Glance

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

Meta Platforms Earnings Update

Meta’s META 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 improvement in Reels impressions and ad prices, cannibalization of other ads on Instagram is likely to end this year or early in 2024, which should drive accelerating revenue growth. Reels has also helped increase time spent on Meta apps, which should further increase ad demand not just on Reels but also on Stories and Feed.

Meta Shows Reduced Dependence on Apple

On the ever-concerning Apple data policies front, Meta’s on-site ad conversions continue to increase, reducing its dependence on data from non-Meta platforms and Apple. Meta has also enhanced its ad measurement capability to better handle Apple’s restrictions, lowering hesitancy by 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 share repurchases and reinvest in enhancing artificial intelligence-powered family of apps features, while also investing in the metaverse, the firm’s long-term focus.