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

Meta Platforms released its second-quarter earnings report on July 30. Here’s Morningstar’s take on Meta’s earnings and stock.

Key Morningstar Metrics for Meta Platforms

• Fair Value Estimate: $850.00
• Morningstar Rating: ★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Meta Platforms’ Q2 Earnings

Meta closed the second quarter of fiscal 2025 with excellent financial results, which included sales growing 22% to $47.5 billion and operating margins rising 500 basis points to 43%. The firm’s capital expenditures for 2025 are expected to reach $69 billion, up from $68 billion previously estimated.

Why it matters: Meta’s primary ad business continues to churn out billions of dollars in free cash flow, which the firm is spending on its artificial intelligence ambitions. We remain enthusiastic about Meta’s ability to drive better engagement and monetization on its social media platforms by leveraging AI tools.

• While investors have been concerned this year about macro headwinds and their impact on Meta’s digital ad sales, we continue to view the firm’s ad business as resilient. We attribute this resilience to the firm’s superior return on ad spending that continues to attract customers.
• Meta’s strategy of using AI tools to drive better engagement and monetization of its platforms continues to go strong. Meta saw more time spent on Instagram and Facebook, more advertisers using AI creative tools, and AI-improved ad recommendations leading to higher conversion rates.

The bottom line: We are raising our fair value estimate for wide-moat Meta to $850 from $770 as we factor in the strong quarterly performance as well as higher top-line growth due to continued AI-led improvements in user engagement and ad monetization.

• With shares trading up sharply following the earnings result, we view them as marginally undervalued relative to our updated fair value.

Between the lines: With Instagram and Facebook well-saturated with ads, Meta has begun ads on Threads and WhatsApp as it looks to increase its ad supply, which should boost sales over time. We see this move as value-accretive as the firm increases its ad surfaces and monetization simultaneously.

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 $850 per share. We forecast Meta’s sales growing at a 14% compound annual growth rate for the next five years, spearheaded primarily by an increase in average revenue per user, with user growth also chipping in.

Drilling deeper, we believe Meta has a strong monetization opportunity ahead of it in Asia and the rest of the world. While we expect advertising sales from North America and Europe to grow steadily, we believe increasingly affluent and growing middle classes in Asia, Africa, and the Middle East will allow Meta to improve its ad monetization in those regions, lifting its overall top line.

While we expect Reality Labs sales to grow at a double-digit rate over the next five years, we believe Meta’s advertising juggernaut will remain the primary driver of its business and intrinsic value over our explicit forecast.

Read more about Meta Platforms’ fair value estimate.

Economic Moat Rating

We believe Meta merits a wide economic moat rating due to the firm’s intangible assets and the potent network effect around its Family of Apps business. While the firm’s Reality Labs segment continues to hemorrhage cash, we believe the strong competitive advantages of the FoA business will likely allow the firm to generate returns over its cost of capital over the next two decades.

We assign a wide moat rating to the FoA business. We believe the firm has built significant intangible assets, primarily via the customer data it collects and a potent network effect that has enabled Meta to be the most dominant social media platform in the world.

Read more about Meta Platforms’ economic moat.

Financial Strength

We view Meta’s financial position as rock-solid. The firm closed out fiscal 2024 with cash and cash equivalents of $78 billion, more than offsetting its debt balance of $29 billion. While the firm’s investments in AI stand to considerably increase its capital expenditure over the next few years, the advertising business remains a cash-generating machine, churning out tens of billions of dollars of free cash flow on an annual cadence.

Read more about Meta Platforms’ financial strength.

Risk and Uncertainty

We assign Meta an Uncertainty Rating of High. We believe Meta’s investments in unprofitable ventures such as generative AI and Reality Labs add a layer of uncertainty, even as its large and stable advertising business continues to generate substantial cash flows in our forecast.

We believe Meta’s considerable scale and intangible assets, such as its ad-targeting algorithms, will likely enable the firm to maintain its dominance in the social media application space. While there are antitrust concerns around Meta’s business, with US antitrust regulators pursuing a monopoly case against the firm, we view an often-hypothesized breakup of Meta’s applications into separate businesses as unlikely. At the same time, the firm faces headline risk as the case moves through the courts.

The firm’s high dependence on user behavior data represents an environmental, social, and governance risk. If it fails to maintain adequate data privacy and security, Meta’s advertising business will likely suffer. Also, the broader impact of social media on its users’ mental health, especially that of teenagers, is also a pertinent ESG risk for Meta. There appears to be bipartisan support in the US for increased regulation of social media platforms that could include forcing Meta to change its content recommendation algorithms, potentially hitting the firm’s advertising business.

Read more about Meta Platforms’ risk and uncertainty.

META Bulls Say

• Meta’s core advertising business has benefited greatly through improved ad targeting and content recommendation algorithms, as well as a secular increase in digital advertising spending.
• Meta’s scale, with the majority of the world’s internet-connected users accessing its applications, gives it access to high-quality user data, which it can package and sell to advertisers.
• The firm has an opportunity to drive ad inventory growth, leveraging new products such as Threads while improving its monetization of ads on more nascent features, such as Stories and Reels.

META Bears Say

• Meta’s investments in Reality Labs and generative AI stand to cost the firm billions annually, taking some of the shine off its overall business.
• The firm has a monopoly case against it in the US, which could potentially force it to break up, severing some of the scale advantages it has built.
• Meta has disproportionately benefited from increased ad spending by Chinese retailers like Temu and Shein. A slowdown in spending from these firms could hit Meta’s growth.

This article was compiled by Isela Meraz.