Meta Platforms Q3: Massive Earnings Beat

Summary:

• Meta Platforms, Inc. reported a double beat, the seventh in a row.
• Meta Platforms keeps growing its margins, resulting in outsized earnings growth.
• Meta’s valuation is not very high, considering its growth rate and market position.

Article Thesis

Meta Platforms, Inc. (NASDAQ:META) delivered another huge earnings beat when it reported its Q3 results on Wednesday. While the stock has gotten pricier than it used to be in the recent past, the company’s excellent growth rate justifies the valuation.

Past Coverage

I have written about Meta Platforms in the past, most recently in early August, three months ago, when I covered the company’s second-quarter earnings release. I gave the company a “Buy” rating back then, which has worked out fine so far, with META rising by 14% over the past three months. With one quarter having passed since then, and with META now bringing out its most recent earnings results, it is time for another article on the social media giant.

What Happened?

Meta Platforms, Inc. released its Q3 earnings data on Wednesday, following the market’s close. The headline numbers looked like this:

The company beat estimates on both lines, which isn’t new for investors — the company has now delivered a double beat for seven quarters in a row. Wall Street analysts remain far too bearish on the social media giant.

The revenue beat was pretty small, at less than 1%, although the growth rate was still excellent — Meta Platforms, despite its massive size, managed to grow its sales by close to 20% over the last year.

The earnings per share beat was massive, at close to 15%, which is splendid news for investors. After all, earnings do ultimately drive a company’s share price. Thus, this is the more important metric among the two.

Initially, shares declined slightly following the earnings release, but it remains to be seen if that holds into Thursday’s session. If it does, this could be a bit of a “sell the news” event. Shares rose sharply over the last year (+96%). Thus, there are likely many investors who are interested in locking in some gains.

META: Strong Performance Continues

Let’s delve into the details of the earnings report. The company’s user count, or family daily active people, totaled 3.29 million during the third quarter, which represents a growth of 5% compared to one year earlier. The fact that META was able to add around 150 million new active people to its social media platforms over the last year, even though META is already so large, is admirable. That being said, the growth rate was down slightly compared to one quarter earlier — in Q2, Meta Platforms’ user count growth rate had been 7% on a year-over-year basis.

I wouldn’t over-interpret this sequential decline in the company’s user count growth rate. However, investors may want to keep an eye on that metric in the coming quarters to see if this is a trend that will remain in place. Snap Inc. (SNAP) also reported better-than-expected results this week. While it does not look like users are switching from Meta’s social networks to Snap — META’s user count continues to grow, after all — Snap may have made some minor inroads versus Meta Platforms in the third quarter. Again, I do not think this should be over-interpreted based on one quarter’s data, but it’s worth watching in future quarters.

The good news is that META has several ways to drive revenue, it is not solely dependent on adding new users (although it continues to do that as well). Revenue is also growing thanks to the fact that revenue per user keeps growing. Meta Platforms offer one of the best ways for consumer goods companies to engage with consumers and show their ads to them. Thus, Meta Platforms have excellent pricing power. The company has been able to grow its revenue per user reliably in the past, and that trend continued during the third quarter. Election ads in the United States may have provided a bit of a one-time boost during the quarter. However, since most of META’s users aren’t from the US, it is unlikely that this was an especially large factor in the company’s ability to deliver a nice improvement when it comes to monetizing existing users.

All in all, this was enough for a revenue increase of close to 20%, which is, I believe, excellent, considering Meta Platforms’ already massive size and the fact that the company has been around for quite some time. Its social networks aren’t new, after all, and yet the company keeps wringing more and more money out of its user base.

Earnings Growth

As noted earlier, revenue growth is important, but earnings growth is even more important — earnings per share growth is a key factor for share price appreciation over the long run. Meta Platforms did very well on the profit side, with earnings per share rising by 37% over the last year. This was possible thanks to several contributing factors.

The first one is the cost side: Meta Platforms saw its expenses rise by 14% year-over-year, which is not a low growth rate per se, but a lower one compared to the company’s business growth rate. META saw its headcount climb by 9%, which is very reasonable for a company that grows its revenue by more than twice that pace. Costs grew at an above-average pace of around 20% in the Research & Development space, which is not a bad thing — these expenses can be considered an investment in the company’s future. If its engineers and developers make META’s platforms even better going forward, then users will possibly use them more and more, which will drive revenue per user growth. Furthermore, new developments and functions may result in further user count growth.

Importantly, marketing & sales expenses as well as general & administrative expenses did not grow — they declined compared to one year earlier. This indicates, I believe, that management is adamant about controlling costs and about running a tight ship, which is good for investors. If general & administrative expenses were growing quickly, that would be an indication that the company is getting more bloated and less productive, but that is thankfully not the case — META learned from its over-hiring mistakes during the pandemic.

Growing revenues and tight cost controls allowed META to grow its operating margin by 300 base points over the last year, to 43%. That’s not quite as much as what NVIDIA Corporation (NVDA) has done in the recent past, but still an extremely impressive number. META saw its taxes decline over the last year, which is why net profit rose more than operating profit, but eventually, taxes will most likely not continue to trend down.

I thus believe that operating profit growth and net profit growth will be more in line with each other going forward. Earnings per share grew slightly faster than company-wide net profit, which is the result of META’s share repurchases, which lowered the share count by around 2% over the last year, with share-based compensation already being accounted for. Apple Inc.’s (AAPL) buyback pace is higher, at close to 3%. On the other hand, Apple isn’t growing nearly as fast as Meta on a revenue and profit basis. Thus, I can live very well with the fact that META does not have the highest buyback pace among the Mag 7 stocks.

On the cash flow side, things looked good as well. Operating cash flow jumped by $4.3 billion, and while META invested more in new equipment (such as Nvidia’s chips), capital expenditures rose by “just” $1.8 billion over the last year, meaning free cash flows expanded by around $2.5 billion compared to the previous year’s quarter. The current free cash flow run rate is around $66 billion a year, resulting in a price-to-free cash flow multiple of around 22, which doesn’t seem high.

Valuation

This gets us to the next point, Meta Platforms’ valuation. Based on current earnings per share estimates, META trades at 27x to 28x this year’s profit, but those earnings per share estimates will surely get revised upwards following META’s big Q3 earnings beat. Accounting for that, I believe that the “true” earnings multiple for this year is closer to 26 or so. Looking into 2025, which starts two months from now, Meta Platforms trades at 24x net profits, not accounting for potential 2025 earnings per share upward revisions.

Meta Platforms traded at a lower valuation one year ago, and especially two years ago, when shares were very cheap as shareholders were very pessimistic. META was an even better investment back then compared to today, of course. But even today, following hefty gains in 2024, META is not expensive, considering the excellent market position and strong growth rate. With an earnings multiple in the 20s and an earnings per share growth rate of more than 30%, the PEG ratio is well below 1.

Takeaway

No investment is risk-free, and that also holds true for META. Regulators could be a potential risk as well — currently, the focus is on breaking up Alphabet Inc. (GOOG), (GOOGL), but they might move against META in the future, too. That being said, I don’t think this is a particularly large risk.

With growing revenues, growing margins, a solid pace of shareholder returns, rising cash flows, a fortress balance sheet, and a very reasonable valuation, META remains an attractive long-term investment, I believe.

---

Analyst’s Disclosure: I/we have a beneficial long position in the shares of META; GOOG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

---

Is This an Income Stream Which Induces Fear?

The primary goal of the Cash Flow Kingdom Income Portfolio is to produce an overall yield in the 7% – 10% range. We accomplish this by combining several different income streams to form an attractive, steady portfolio payout. The portfolio’s price can fluctuate, but the income stream remains consistent. Start your free two-week trial today!