Meta Platforms META released its fourth-quarter earnings report on Feb. 1, 2024. Here’s Morningstar’s take on 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
What We Thought of Meta Platform’s Earnings
Meta continues to execute well on all fronts, as indicated by its fourth-quarter results, its guidance, and the welcoming adjustment in its capital allocation, which will likely further benefit shareholders. The firm’s strong network effect was demonstrated by user growth, higher engagement, more impressions (or ads sold) at higher prices, lower user and advertiser acquisition costs, and margin expansion.
However, we think all this—along with further growth and margin expansion—may be priced in, as we believe Meta is a bit overvalued. Advertising spending is likely to slow down, and economic growth is expected to decelerate. Digital ad spending now represents over 75% of total ad spending, and that pie is not growing quickly. Historically, it has been 1.00%-1.60% of the GDP, and around 1.16% during the last 10 years. We are assuming it will be 1.3%-1.4% going forward, implying it will grow only a bit faster than the economy. Plus, digital ad spending is already the largest part of advertising spending (75%), and the upside is not much, possibly increasing to 85%-90%.
With China’s economy in question and more tensions in the Red Sea and overall in the Middle East (which will impact exports from China, especially those heading to Europe), ad spending by Chinese businesses could be affected, which may impact Meta’s top-line growth. At least 10% of Meta’s revenue comes from businesses in China purchasing ads on the firm’s platforms in the United States and Europe. Regulatory risks remain, especially in the international markets. Further, while we welcome the firm’s declared dividends, we think it may also suggest management is expecting revenue growth deceleration.
Fair Value Estimate for Meta
With its 2-star rating, we believe Meta’s stock is overvalued compared with our long-term fair value estimate.
Our fair value estimate represents an enterprise value of 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 anticipate a solid 16% growth in ad revenue during 2024, followed by 9% growth in 2025, assuming continuing economic expansion and further increases in Reels monetization. We expect Meta’s monthly active users to grow about 2% annually, mainly due to growth in Asia and the “rest of the world” geographies. We also assume a deceleration in overall advertising revenue per user growth to 8% per year over the next five years, down from the average of 12% over the past five years.
We have modeled an average annual growth of 11% over the next five years. Increasing efficiency as a result of Meta’s restructuring efforts should more than offset its plans to further invest in research and development, content creation, data security, and virtual/augmented reality offerings (the metaverse). We see the average operating margin improving from 2024 through 2028. We expect an average operating margin of 39% during the next five years, above the previous three years’ 33%. We look for an increase in operating expenses growth in 2024, due to the firm’s return to hiring and investments in artificial intelligence. We have assumed a 37% operating margin for 2024, higher than the nearly 35% reported in 2023. In 2024 and beyond, we expect further revenue growth along with the firm’s efforts to operate more efficiently to expand margins further.
Economic Moat Rating
We assign Meta a wide moat based on network effects around its massive user base and intangible assets comprising 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 the company 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 its offerings—mainly Facebook, Instagram, Messenger, and WhatsApp—have strengthened its network effects, whereby all these services become more valuable as more people both join and use them. These network effects serve to both create barriers to success for new social network upstarts and barriers to exit for existing users, who might leave behind friends, contacts, pictures, memories, and more by departing to alternative platforms.
Risk and Uncertainty
We believe that while barriers to exit may be increasing for the nearly 3 billion Facebook users and nearly 4 billion family of app users, the risk remains of another disruptive or innovative technology (such as TikTok) luring users away from Meta. We do not expect competition in the form of a substitute for Meta, as most consumers use more than one social network. However, given the fixed number of hours per day, an increase in usage and engagement on one network could come at a cost to others, reducing engagement and the potential return on investment for advertisers. Furthermore, even with Meta’s dominant position, its high dependence on the continuing growth of online advertising could heighten the negative impact of a lengthy downturn in online ad spending, resulting in a much lower fair value estimate.
The firm’s high dependence on user behavior data also represents an environmental, social, and governance risk. Regulatory agencies around the world could impose limitations on what user and usage data Meta can compile, and how that data can be utilized. A lack of data privacy and security, as well as data misusage, could negatively affect users.
Additional ESG risks come from the firm’s business ethics and product governance. Questions remain regarding data usage and content management, and whether Meta has double standards, and they may resurface. This issue will also create uncertainty regarding the firm’s product and feature offerings to users and advertisers.
Lastly, some governments may simply forbid access to Meta’s apps, which could result in lower user growth and user interaction. Like Alphabet GOOGL, Meta faces limitations on the M&A front, as the U.S. and other countries attempt to lessen the firm’s dominance in advertising and the overall internet market.
META Bulls Say
- With more users and usage time than any other social media company, 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 artificial intelligence 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 affected severely if online advertising no longer grows or if more advertising dollars shift to the likes of Google or Snap SNAP.
- Despite rapid user growth, many of Meta’s customers may also belong to other platforms, such as Snapchat or TikTok, so the firm will continually have to fight to capture a user’s time and engagement with its properties.
- 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 Freeman Brou.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.