Earnings reports from Meta Platforms and Amazon; Happy birthday to me!

1) 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), Alphabet (GOOGL), Meta Platforms (META), and Amazon (AMZN). (I discussed Alphabet's earnings report on Wednesday.)

Since then, through prices as of this morning (including Amazon's big move), they are up 124%, 220%, 220%, and 114%, respectively – an average of 170% versus 99% for the S&P 500.

On Wednesday, Meta reported third-quarter earnings, as did Amazon yesterday. So let's take a look at both, starting with Meta...

(You can see the full earnings release here and investor presentation here. And here's the story on the front page of yesterday's Wall Street Journal (WSJ): Meta Reports Record Revenue, Slower Digital Advertising Growth.)

Revenue jumped 19% year over year ("YOY"). This was driven by three main factors...

First, the number of daily active users of Meta's family of apps rose 5% YOY to 3.29 billion. (That's a staggering number considering there are about 8 billion people on Earth, 6 billion of whom are aged 15 or older – meaning 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 7% YOY.

Finally, Meta was able to charge an 11% higher average price per ad than the same period last year.

Meanwhile, costs and expenses only rose 14% YOY. And the tax rate dropped from 17% in 2023's third quarter to 12% this quarter.

All of this translated into phenomenal earnings per share ("EPS") growth of 37% to $6.03, obliterating estimates of $5.25.

This chart from the investor presentation shows the incredible earnings growth over the past two years:

Yet the stock was down 4% yesterday, because Meta said it expects "significant" growth in capital expenditures ("capex") next year to keep up in the artificial-intelligence ("AI") arms race. It raised the lower end of its forecast for 2024 capex to $38 billion from $37 billion at the end of the second quarter.

Here's a WSJ "Heard on the Street" column about the AI arms race: Meta and Microsoft: AI's Spending Champs Won't Be Tapping the Brakes. Excerpt:

Microsoft and Meta Platforms might appear to have little in common. But both are betting large sums on artificial intelligence, and neither is yet inclined to slow down...

And both said the blowout capital spending that has been fueling their race into AI services will continue in the current quarter, with Meta giving strong signals that next year will bring even more.

Alphabet's Google and Amazon.com are running in the same race. But the recent pattern of spending at Microsoft and Meta stands out more, relative to their historic patterns. The $53 billion that Microsoft has spent already in this calendar year represents about 28% of the company's revenue for that time – far above the 12% of revenue Microsoft has averaged on capex for the years 2014-23. Meta said it plans to spend between $38 billion and $40 billion on capex this year, which would represent about 24% of Wall Street's projected revenue for the year. The company has spent on average about 19% of its revenue on capex over the past 10 years.

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:

Back up the truck. [Mark] Zuckerberg is executing on all fronts – margins are up even as spending is up – which shows the operating leverage in the business. When you look under the hood, user engagement is up across all products, cost per ad unit is up and number of users is up – all with a heavier ad load and in a competitive market. Very few businesses see this happen all at once.

Their product suite is diverse and large parts are underdeveloped, namely WhatsApp/messaging, Reality Labs (Metaverse), and LLAMA (Large Language Model Meta AI). WhatsApp is early but showing strong traction and I see outside businesses building on the platform that are growing exponentially. Huge potential here. Reality Labs is still a drag but they have their first breakout hit in the Ray-Ban Meta glasses – so the basic market fit is starting to find proof. And imagine what LLAMA is worth!

Regarding the payoff from Meta's heavy investments in AI, he wrote:

Meta is the first business to use AI at scale across its products with strong positive return on investment ("ROI"), but they have yet to find an external business model. They have the largest user base out there for LLAMA and I agree that open source is the better way to build a multi-modal AI long term. ChatGPT recently raised money at a valuation of $157 billion, yet analysts aren't incorporating LLAMA's value in the overall value of Meta.

He summarized:

Earnings and revenue are at records, and yet the stock is down on nervousness around spend – an old theme. Yet, as before, Zuckerberg has a strong sense of the ROI behind the spend and we just have to wait to see the value. He does not seem to have veered from his long-term principle of putting users and excellent products first, ahead of revenue. Impatient investors have missed out (and will continue to miss out) on the growth in the stock because they don't understand this.

The earnings are growing and a simple forward price-to-earnings (P/E) multiple gets you to well north of the current stock price. This continues to be one of the most profitable (at scale) businesses ever built – that can dial profits up (or down) at any point.

Zuckerberg chooses not to because greater profits and a much larger realization of his vision to impact the world will emerge (and have historically emerged) from his investment in the business.

I am a buyer at these levels.

But what about Meta's valuation?

At a close of $567.58 yesterday, that meant the stock would be trading at 26.5 times the consensus analysts' EPS estimate of $21.41 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 P/E multiple around that of the average large American business (i.e., the S&P 500 Index). That makes no sense.

I agree with my friend: Meta's stock remains a buy.

2) Amazon reported strong earnings yesterday after the close, and shares were up as much as 8% this morning. (You can see the full earnings release here and investor presentation here. And here's the story in today's WSJ: Amazon Shares Rise on Robust Demand, Surge in AI Infrastructure Spending.)

Net sales grew 11% YOY to $158.9 billion, and net income rose 55% YOY to $15.3 billion, both beating expectations.

This chart from the investor presentation shows how profits have grown in the past year:

The highly profitable Amazon Web Services ("AWS") business led the way. This next chart from the presentation shows AWS net sales and operating income over the past five quarters:

Advertising revenue, which is nearly pure profit, grew 19% YOY to $14.3 billion.

The only reason the stock isn't up even more after such a strong report is that, as with Microsoft, Alphabet, and Meta, investors are worried about Amazon's surge in capex, driven by the AI arms race. In the third quarter, capex spiked 81% YOY to $22.6 billion.

Amazon now has an enterprise value of $2.1 trillion, with trailing-12-month ("TTM") sales of $620 billion and TTM net income of $49.9 billion. That means the stock is trading at 3.4 times revenue and about 42 times earnings.

Those are all big numbers, but Amazon is a juggernaut. And it's growing earnings so fast that it's only trading at 32 times next year's EPS estimates of $5.77 (which will likely be revised upward after yesterday's report).

So if I owned the stock, it would be a comfortable hold... And if I didn't, I would look to buy on any meaningful pullback.

3) It's my 58th birthday today! Here are some baby pictures I shared with my family:

I'm taking a page from my daughters' playbook and having multiple celebrations – dinner with my parents in New Hampshire last night, dinner with my wife Susan at a friend's house tonight (after a long bus ride home), and on Monday, a Brooklyn Nets game with Susan and our two older daughters who live in Manhattan (our youngest is at college in Minnesota).

And our really big celebration (which also includes Susan's birthday and our 31st anniversary last month) is a two-week trip to New Zealand, departing next Thursday.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.