Meta Earnings: Strong Ad Growth, First Dividend Supercharge Stock Price

Key Morningstar Metrics for Meta Platforms

• Fair Value Estimate: $400.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Meta’s Earnings

We are increasing our Meta META fair value estimate significantly to $400 from $322, as we are more optimistic about its profit margin expansion. Meta’s fourth-quarter results showed strong network effects, which attracted more users and increased engagement while allowing it to sell more ads at higher prices with lower user and advertiser acquisition costs, impressively expanding margins. We also commend Meta for instituting a dividend alongside share buybacks.

However, we think the stock remains overvalued. Meta’s advertising growth may benefit in 2024 from easier comparisons and political ad spending, but we foresee a slowdown in 2025-28 as economic growth moderates. The traditional drivers of digital ad spending growth, such as online users and mobile expansion, are less influential. Innovations like artificial intelligence may improve ad effectiveness and efficiency but won’t significantly accelerate spending growth in our view. While digital ad spending grew around 20% annually over the past 25 years, overall ad spending increased by just 4% yearly, staying within 1.0%-1.6% of gross domestic product. We think it will remain at the midpoint of this range through 2028.

We are also cautious of increased geopolitical risks, especially Meta’s growing reliance on Chinese businesses, which contributed 10% of its fourth-quarter revenue. This demand could decline amid China’s economic uncertainties and rising Middle East tensions, potentially affecting supply chains.

In addition, Meta and its peers continue to face pressure from regulators in the U.S. and international markets regarding data access and usage and censorship of content, all of which could affect user interaction and demand from advertisers.

Total fourth-quarter revenue of $40 billion was up 25% from last year, driven by both advertising revenue (up 24%) and reality labs (up 54%), which was helped by strong holiday sales of Quest 2 and Quest 3. Operating margin expanded to 41% from 20% last year.