A review of Meta Platforms' earnings and current valuation
In the April 17, 2019 inaugural issue of my former newsletter Empire Investment Report at my old firm Empire Financial Research, I recommended four core holdings: Berkshire Hathaway (BRK-B), Amazon (AMZN), Alphabet (GOOGL), and Meta Platforms (META).
Since then, through yesterday's close, they are up 123%, 154%, 215%, and 278%, respectively – an average of 193% versus 108% for the S&P 500 Index.
Meta reported fourth-quarter earnings yesterday, so let's take a look... (You can see the full earnings release here, investor presentation here, and conference call opening remarks here. And here's the story from the Wall Street Journal: Meta Platforms Sales Soar to Record, Bolstering Zuckerberg's AI Spending Spree.)
Revenue jumped 21% year over year ("YOY"). This was driven by three main factors...
First, the number of daily active users for Meta's family of apps, which include Facebook and Instagram among others, rose 5% YOY to 3.35 billion. (That's a staggering number considering there are 8 billion people on Earth, about 6 billion of whom are aged 15 or older. Essentially, Meta is reaching more than half the world's adult population every day.)
Second, Meta fed these users a few more advertisements, as "ad impressions delivered" rose 6% YOY.
Finally, Meta was able to charge a 14% higher average price per ad than the same period last year.
Meanwhile, costs and expenses only rose 5% YOY – astoundingly small growth given the strong jump in revenue. And the tax rate dropped from 17% to 12%.
All of this translated into phenomenal earnings-per-share ("EPS") growth of 50% to $8.02, obliterating estimates of $6.68.
This chart from the investor presentation shows Meta's strong revenue growth over the past two years:
Expenses are growing much slower, so they're falling as a percentage of revenue:
As a result, EPS is soaring:
Mostly to keep up in the artificial-intelligence ("AI") arms race, capital expenditures ("capex") nearly doubled from $7.6 billion to $14.8 billion – for a total of $39.2 billion in 2024. Management expects capex to be between $60 billion and $65 billion in 2025, the majority of which will be directed to Meta's core business – perhaps a relief to investors who feared endless increases in AI spending.
Meta guided for first-quarter currency-adjusted revenue growth of 11% to 18%, which I believe will likely prove to be conservative.
All in all, for a company this large to be growing at this rate is simply mind-boggling.
For further insights on Meta, I reached out to an old friend yesterday who has been an entrepreneur, executive, and investor in the tech sector for the past three decades. He invested in Meta when it was still a private company (at well under $1 per share – shares that he still owns!) and knows the company better than just about anyone. He e-mailed me:
It's really one word: "AI." Scale and economics to self-fund the enormous required infrastructure combined with a large growing audience that benefits from their core focus results a better user experience.
I have always wondered what a company that touches and connects almost half the world everyday can do/deliver? Meta has clearly proven to be adept at building products that people need and want and now with AI it's clear there is an amazing road ahead.
But honestly I think we still can't even imagine what will come in the future. No company has ever existed like this in the world.
But what about Meta's valuation?
At a close of $676.49 yesterday, that meant the stock would be trading at 26.6 times the consensus EPS estimate of $25.42 for this year (coming into the earnings report). But Meta blew past EPS estimates and gave solid guidance, so analysts are scrambling to revise their models.
In summary, the stock of one of the greatest businesses of all time, which is firing on all cylinders, is currently trading at a price-to-earnings multiple around that of the average large American business (i.e., the S&P 500 Index). That makes no sense, considering its phenomenal rate of growth and the sheer reach of its products across the globe.
With all this in mind, Meta's stock looks downright cheap at current levels.
Best regards,
Whitney
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