Stock of the week - Meta Platforms (25.04.2024)

• Meta Platforms reported Q1 2024 earnings yesterday after close of Wall Street session
• Q1 results beat expectations
• Forward guidance disappoints
• Meta says that AI helped improve user growth and ad revenue
• A look at valuation
• Stock slumped 15% at session launch

Meta Platforms (META.US) reported results for Q1 2024 that turned out to be better-than-expected. However, stock has nevertheless plunge in response to the release as investors were disappointed with company's guidance. Was it really that bad to justify a double-digit post-earnings share price slump? Let's take a look at the latest earnings report from Meta as well as company's valuation.

First quarter earnings beat expectations…

Meta Platforms reported financial results for Q1 2024 on Wednesday after the close of the Wall Street session. Results were not that bad. Actually, they were mostly better than expected. Company reported higher-than-expected revenue, with beat being driven by better-than-expected advertising revenue. Total expenses were lower-than-expected, paving the way for a beat in profit data. On the other hand, a notable miss was reported in capital expenditures, with analysts expecting almost $2 billion higher investments during the quarter.

Revenue in Reality Labs, company's Metaverse division, grew almost 30% YoY, but was lower than expected. Nevertheless, operating loss in the segment not only turned out to be much smaller than expected but also smaller than in a year ago period. This is a very positive development. However, the segment continues to generate significant losses.

Q1 2024 earnings

• Revenue: $36.46 billion vs $36.12 billion expected (+27.3% YoY)
  • Family of Apps: $36.02 billion vs $35.53 billion expected (+27.2% YoY)
    • Advertising: $35.64 billion vs $35.57 billion expected (+26.8% YoY)
    • Other: $380 million vs $300 million expected (+85.4% YoY)
  • Reality Labs: $440 million vs $494 million expected (+29.8% YoY)
• Average Family of Apps users per day: 3.24 billion vs 3.16 billion expected (+7.3% YoY)
• Total expenses: $22.64 billion vs $22.84 billion expected (+5.7% YoY)
• Gross profit: $29.82 billion vs $28.88 billion expected (+32.3% YoY)
  • Gross margin: 81.8% vs 79.9% expected (81.8% a year ago)
• Operating profit: $13.82 billion vs $13.45 billion expected (+91.2% YoY)
  • Family of Apps: $17.66 billion vs $17.76 billion expected (+57.5% YoY)
  • Reality Labs: -$3.85 billion vs -$4.51 billion expected (-$3.99 billion a year ago)
• Operating margin: 37.9% vs 37.2% expected (25.2% a year ago)
• Income tax expense: $1.81 billion vs $2.31 billion expected (+13.5% YoY)
  • Effective tax rate: 12.8% vs 16.8% expected (21.9% a year ago)
• Net income: $12.37 billion vs $11.36 billion expected (116.7% YoY)
  • Net margin: 33.9% vs 31.2% expected (19.9% a year ago)
• EPS: $4.86 vs $4.47 expected ($2.21 a year ago)
• Capital expenditures: $6.4 billion vs $8.32 billion expected (-6.4% YoY)

Source: Bloomberg Finance LP, XTB Research

…but forward guidance is concerning

However, in spite of this mostly better-than-expected results, Meta's share price slumped in response to the earnings release. This was because of rather disappointing guidance for Q2 2024 and full-2024. Company expects Q2 2024 revenue to reach $36.5-39.0 billion, what would mark a 14-22% year-over-year increase. However, mid-point of the forecast range ($37.75 billion) was below analysts' expectations. Full-year forecasts were also somewhat disappointing. Company narrowed total expenses forecast range from $94-99 billion to $96-99 billion, with mid-point of the range ($97.5 billion) being above analysts' expectations. On a positive note, full-year capital expenditures forecast was boosted significantly and exceeded markets expectations. 

Q2 2024 forecast

• Revenue: $36.5-39.0 billion vs $38.24 billion expected

Full-year 2024 forecast

• Total expenses: $96-99 billion, up from previous range of $94-99 billion (exp. $96.9 billion)
• Capital expenditures: $35-40 billion, up from previous range of $30-37 billion (exp. $34.5 billion)

While Meta Platforms revenue growth continued to accelerate in Q1 2024, company expects a slowdown in Q2 2024. Source: Bloomberg Finance LP, XTB Research

Meta says AI already helped the company

Mark Zuckerberg, CEO of Meta Platforms, tried to calm investors' nerves, saying that company's AI bets will eventually pay off. Nevertheless, promises alone did not buy investors' favour. It looks likely that AI will help the company, for example by helping reduce costs or improving user targeting.  Meta said that part of recent user growth and advertising business improvement was due to AI, which helped improve recommendation algorithms. Nevertheless, lack of clear guidance is disappointing and suggests that Meta is slow to benefit from AI hype.

New set of forecasts hints at slower growth and higher spending ahead, a rather undesirable mix. A better-than-expected Q1 revenue data was welcome as base effects were rather unfavourable. However, those effects will become even more unfavourable later into the year, and spending boost suggests that growth may see a bigger slowdown. 

A look at valuation

Let's take a quick look at valuation of Meta Platforms, using two well-known methods - discounted cash flow model (DCF) and multiples. We often also use Gordon Growth Model in our Stock of the Week analysis, but as Meta has just recently began paying out dividends, the model is not suitable to value the stock. We want to stress that those valuations are for presentation purposes only and should not be viewed as recommendations or target prices.

DCF

Let's start with probably the most popular fundamental model for valuing stocks - Discounted Cash Flow method (DCF). This model relies on a number of assumptions. We have decided to take a simplified approach and base those assumptions on averages for the past 5-years. Detailed forecasts for 10 years were made, with terminal value assumptions being set as follows - 4% terminal revenue growth and 9.5% terminal weighted cost of capital (WACC). Such a set of assumptions provides us with an intrinsic value of Meta's shares of $460.75 - or almost 10% above today's cash session opening. Terminal value forecast accounts for around 73.3% of DCF valuation.

A point to note is that the intrinsic value obtained via the DCF method is highly sensitive to assumptions made. Two sensitivity matrices are provided below - one for different sets of Operating Margin and Revenue Growth assumptions and the other for different sets of Terminal WACC and Terminal Revenue Growth assumptions.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Multiples

Next, let's take a look at how Meta's valuation compares with peers. We have constructed a peer group consisting of 4 companies - Alphabet, Baidu, Snap and Pinterest. We have taken a look at 6 different valuation multiples - P/E, P/BV, P/S, P/FCF, EV/Sales and EV/EBITDA.

Taking a look at the table below, we can see that there is a lot of volatility in multiples for Meta peers, with companies with smaller capitalization often being outliers. Means are inflated by this. Having said that, we have decided to calculate median and capitalization-weighted multiples and base valuations on them. Using median multiples provides us with valuations ranging from $289.97 in case of P/S multiple to $634.07 in case of P/FCF multiple. A trimmed mean (excluding the highest and lowest valuations) provides us with an intrinsic value of $419.14 per share, more or less in-line with today's session opening ($420).

Source: Bloomberg Finance LP, XTB Research

Meta makes the biggest drop since October 2, 2023

Disappointing forecast outweigh better-than-expected earnings, triggering a massive plunge in Meta Platforms (META.US) shares. Stock slumped 15% at session launch, marking the biggest intraday drop since October 2, 2023. Taking a look at the chart at H1 interval, we can see that the stock plunged to the lowest level since Q4 2023 earnings release. Stock dropped below the lower limit of the recent $480-510 trading range and also hit the textbook target of a downside breakout ($450).  

Source: xStation5