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

Meta Platforms META is set to release its first-quarter earnings report on April 24. Here’s Morningstar’s take on what to look for in Meta’s earnings and 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

Earnings Release Date

• Wednesday, April 24, after the market close

What to Watch for In Meta’s Q1 Earnings

• Continued growth in users and engagement across platforms. Given the maturity of Facebook and Instagram, can Meta continue its streak of impressive gains in usage that have allowed for solid growth in ad sales volumes? The firm is starting to lap the big gains in ad impressions it saw from the end of 2022 into 2023.
• Can ad pricing hold up? Average ad pricing declines moderated into the single digits in the second half of 2023 as ad demand rebounded nicely. Has that demand continued into 2024? Have investments in ad technology (including artificial intelligence) helped with advertiser returns on ad spending?
• What is the outlook for investment in the business, especially around capital spending? Is the firm plowing ahead with plans to invest in data center capacity? What areas of growth is it seeing tied to recent investments?

Fair Value Estimate for Meta

With its 2-star rating, we believe Meta’s stock is overvalued compared with our 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 a solid 14% growth in ad revenue in 2024, followed by 12% growth in 2025, which assumes continuing economic expansion and further increases in Reels monetization.

We anticipate 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, 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 the firm’s various sites and apps. Given its ability to profitably monetize its network via advertising, we think Meta will likely generate excess returns on capital over the next 20 years.

As the clear-cut social media leader, we believe Meta’s offerings have strong network effects, wherein its platforms become more valuable to users as more people join. These network effects create barriers to success for rival upstarts and barriers to exit for users, who might leave behind friends, contacts, pictures, memories, and more by departing for alternative platforms.

Read more about Meta’s moat rating.

Financial Strength

In an industry that requires continual investment to compete and maintain 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 from operations in 2023, 41% higher than the prior year, mainly due to cost-control policies and the return of top-line growth. While capital investment remains elevated over 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 dividend of $0.50 per share early in 2024. The firm will likely use a portion of its cash to repurchase shares and remain active with acquisitions, although it’s limited by continuing FTC antitrust oversight.

Read more about Meta’s financial strength.

Risk and Uncertainty

While barriers to exit may increase for users of Facebook and its family of other apps, a disruptive or innovative technology (recently TikTok) could reduce the time users spend on Meta’s platforms. Increased usage and engagement on one social network could come at a cost to others, reducing user 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 it can be utilized. Lack of data privacy and security, or data misuse, could push users away from the firm’s 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 media online advertising.
• Meta’s ad revenue per user is growing, demonstrating the value advertisers see in working with the firm.
• Applying artificial intelligence technology to Meta’s various offerings and launching VR products will increase user engagement, driving further growth in advertising revenue.

META Bears Say

• Meta is a one-trick pony and will be severely affected if online advertising no longer grows or more ad dollars shift to competitors.
• 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 limit the collection and application of user data, affecting data utilization and growth.

This article was compiled by Liz Angeles.