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

Why it matters: Meta’s advertising behemoth surpassed our expectations on both the top and bottom lines. We were impressed by Meta’s ad impression and price-per-ad growth, with both metrics expanding in the fourth quarter.

• We view Meta as carefully leveraging its investments in artificial intelligence to improve both its content recommendation and ad-monetization models, with the firm’s strong ad sales supporting the argument that these investments are already bearing fruit.
• As a testament to the enduring appeal of its platform, Meta’s global user count ticked up yet another 5% year over year to 3.35 billion. Alongside adding users, Meta’s monetization improved as well, with the firm’s average revenue per user growing an impressive 16% year over year.

The bottom line: We raise our fair value estimate for wide-moat Meta to $770 from $590, with shares now screening as marginally undervalued. The bulk of our fair value increase stems from a revised growth outlook for the firm and a more optimistic view of its generative AI investments.

• We are already seeing Meta’s generative AI tools garner adoption on the advertising side, with more than 4 million advertisers using the firm’s AI tools to create ad campaigns, up from 1 million six months ago.
• On the ad-targeting side, Meta disclosed increased ad quality by leveraging an AI-powered ad ranking system that was able to better personalize ads shown to users.

Key stats: While Meta’s record operating margin of 48% for the fourth quarter is impressive on its own, the firm’s operating profitability for its core Family of Apps segment was even better, with FoA operating margins coming in at 60%, up 600 basis points year over year.

Meta Platforms Stock Price

Source: Morningstar Direct.

Fair Value Estimate for Meta

With its 3-star rating, we believe Meta’s stock is fairly valued compared with our long-term fair value estimate of $770 per share, implying a 2025 adjusted price/earnings multiple of 30 times and an enterprise value/adjusted EBITDA multiple of 16 times.

We forecast Meta’s sales growing at a 12% 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.

Meta Platforms Stock vs. Morningstar Fair Value Estimate

Source: Morningstar Direct.

Read more about Meta Platforms’ fair value estimate.

Economic Moat Rating

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

Meta’s FoA segment includes revenue from its social media applications including Facebook, Instagram, WhatsApp, and Messenger. The firm’s dominance in social media is evidenced by its four primary applications constituting four of the six most popular social media applications globally. Also, Meta’s scale in the social media business is staggering. Almost 4 billion people use at least one of its applications every month. According to various estimates, a little more than 5 billion people worldwide have access to the internet, implying that around 75% of them use Meta’s applications.

The vast majority of this massive base uses these applications free of charge. Instead of paying Meta a subscription fee, they constitute an audience it can advertise to. Meta can accumulate user data, such as demographic information, likes/dislikes, and topics of interest, to feed into its advertising engine, which lets advertisers target ads on Meta’s properties.

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 increase its capital expenditure considerably over the next few years, the firm’s 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 around its business, even as its large and stable advertising business continues to generate substantial cash flows in our forecast.

As we look ahead, we believe Meta’s considerable scale and intangible assets, such as its ad-targeting algorithms, will most 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.

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, lets it access high-quality user data, which the firm can package and sell to advertisers.
• The firm has an opportunity to drive more 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 lose the firm billions of dollars annually, taking some of the shine off its overall business.
• The firm has a monopoly case against it in the United States, which could potentially force it to break up, severing some of the scale advantages it has built up over time.
• Meta has disproportionately benefited from increased ad spending by Chinese retailers like Temu and Shein. A slowdown in spending by these firms could hit Meta’s growth.

This article was compiled by Aman Dagra.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.