Meta Platforms Q3: Significant Near-Term Downside Volatility Is Likely

Summary:

• Meta Platforms beat Q3 EPS by $0.73 and revenue by $159.52M; daily users hit 3.29B (+5% YoY). Yet, its enterprise value is too high, with a -20.5% margin of safety.
• 2024 projected revenue is $163.12B; EBITDA margin likely to expand to 55% by 2034. Reality Labs lost $4.4B in Q3, a division that could present long-term risks.
• Using a 10-year 12% revenue CAGR and a terminal EV/EBITDA multiple of 12.3, META’s intrinsic enterprise value is estimated to be $1.17 trillion vs. the current $1.47 trillion.

In my Meta (NASDAQ:META) Q3 Earnings Preview, I outlined that I expected its market cap to contract by over 4% over the next 12 months due to the company presently being overvalued amid a likely near-term slowdown in its growth rates. I also expected strong Q3 results, and the company has delivered this, but given that the stock is now trading near all-time highs, this seems like a bad entry point—although the long-term thesis remains compelling for buy-and-hold investors. Given the near-term valuation contraction I expect, I caution investors to wait to buy more shares, and my rating is a Hold accordingly.

Q3 Earnings Review: Strong Results Fuel Short-Term Momentum

To begin with, the headline data: Meta beat the normalized EPS consensus estimate by $0.73 and beat the revenue consensus estimate by $159.52 million—these are formidable results. For Q4, management guided for revenue between $45 and $48 billion, making my estimate for its full-year 2024 revenue $163.12 billion. Management also guided for full-year total expenses of $96 to $98 billion and full-year 2024 capital expenditures of between $38 and $40 billion—it’s reasonable to anticipate that these capital expenditures will come in at the higher end given the company’s aggressive stance to AI leadership dependent on its data center expansions. I anticipated capital expenditures of $9 billion for Meta in Q3, but it came in slightly higher, at $9.2 billion.

Astoundingly, Meta continues to grow robustly despite its platforms already being used daily by approximately 40% of the world’s population. In Q3, the company reported that 3.29 billion people use at least one of its core products (Facebook, WhatsApp, Instagram, or Messenger) daily; the global population is estimated to be around 8.05 billion. What is perhaps even more astounding is that nearly 50% of the world’s population (approximately 4 billion people) use Meta’s platforms monthly.

It’s therefore quite incredible that the company achieved a total year-over-year increase in its daily active people across its platforms of 5% in Q3. One can speculate how far management can grow the enterprise; what is the upper limit on daily active people for Meta? 60% of the world’s population? 70%? or even 90%? In reality, 60% by 2030 seems plausible, given the company’s continued expansion and emerging opportunities in developing international markets, but 70% will be challenging due to technology diversification from competitors, including China’s TikTok, Elon Musk’s X, and Snapchat (SNAP). This means that investors need to prepare for slowing growth rates, which is a trend that is already seen across social media platforms as they have become largely saturated in core markets. Astute analysts have emphasized that Meta has recently initiated a dividend (currently, the forward yield is 0.34%); I think management will be wise to gradually transition more heavily toward dividends. Not only will it relieve the company from the pressure to continue growing using potentially unethical tactics when the organic growth limits are already reached, but it will also reward investors with a lower volatility long-term investment stabilized by its dividend payout. That said, this can’t happen immediately; for now, Meta must focus on establishing itself as one of the West’s leaders in AI, requiring heavy capital expenditures and reducing its free cash flow that would otherwise be available to return to shareholders.

I mentioned in my earnings preview that I expected Meta’s Q3 Reality Labs losses could be higher than $4.5 billion. The company did slightly better than I expected, given that the division reported an operating loss of $4.4 billion. The division’s expenses increased by 19% year-over-year, but its revenues grew by 29% to $270 million, driven by hardware sales. Management has anticipated that Reality Labs’ losses will “increase meaningfully year-over-year”, and Zuckerberg seems committed to his future vision here in this regard. This is likely a medium-term liability but a long-term gain for shareholders. It is also the division behind Orion and other new smart, AR, and VR glasses, which, I think, should not be underestimated in the medium to long term.

Given these robust results, it’s quite likely that short-term momentum will be sustained for the next three months. However, wise, long-term value investors will not be initiating a position in Meta right now because, as my following valuation analysis shows, Meta’s enterprise value has a negative 20.5% margin of safety for investment, based on a forward-looking 10-year holding period.

Valuation Analysis: Negative 20.5% Margin Of Safety

Meta has had a robust year for growth, with year-over-year revenue growth of 23% at the time of this writing. However, this is not going to last. In 2025 onwards, we’re going to see a reversion to the mean, with a revenue CAGR of approximately 12% over the next 10 years being optimistic for Meta, given the saturation of its core markets and already well-established user base. With a full-year revenue of $163.12 billion in December 2024 and growing this at my optimistic 12% CAGR, the company will have a full-year revenue of $506.63 billion in December 2034.

The company’s EBITDA margin has averaged 43.57% over the past five years, and it has expanded to 50.7% in the most recent data, indicating further profit margin expansion to come. This is especially true given Meta’s aggressive investment in AI at the moment, which, I believe, will reduce its headcount over the next 10 years significantly. However, margin expansion from AI could be offset if its Reality Labs division fails to prove profitable over the long term. To be conservative but still optimistic, I am estimating that Meta will increase its EBITDA margin to 55% by 2034. Therefore, I estimate that the company will have a full-year 2034 EBITDA of $278.65 billion.

The company’s 10-year median EV-to-EBITDA ratio is 19.2, which is actually higher than its current 18.7. Given that the company will be seeing a significantly lower rate of revenue growth but a moderately higher profit margin, the EV-to-EBITDA ratio is likely to contract over 10 years. I will be using an EV-to-EBITDA terminal multiple of 12.3 in light of this, which is its current forward five-year average. Therefore, I estimate that Meta will have an enterprise value of $3.43 trillion in December 2034.

Meta’s weighted average cost of capital is 11.36%, calculated by combining the 11.63% cost of equity weighted at 97.41% and the 1.51% cost of debt weighted at 2.59%. This debt cost is adjusted by Meta’s tax rate of 13.11%. I will be using this for my discount rate. When discounting $3.43 trillion back over 10 years at a discount rate of 11.36% to its intrinsic enterprise value in December 2024, the result is $1.17 trillion. As the company’s current enterprise value is $1.47 trillion, this indicates a negative 20.44% margin of safety.

Contrarian Analysis

1. Meta’s focus on emerging economies for revenue growth will mean that the company delivers lower margins from these international markets. This is because the capital available to many people in these regions is not as high as in developed Western and Eastern economies. Ad rates depend on the competitive bidding environment for ad placements, meaning the average revenue per user is typically lower due to reduced ad spend by local advertisers. This could be one critical element that strains Meta’s EBITDA margin, even while AI and automation in its headquarters operations expand it. As such, my estimate that Meta’s EBITDA margin will expand to 55% by 2034 could be too optimistic, and Meta could be further overvalued than my model indicates.
2. In addition, in a highly optimistic scenario with further successful M&A, a profitable Reality Labs venture compounding revenues from this segment, and widespread innovation, the company’s revenue CAGR could reach 15% over the next 10 years. I find this to be somewhat unlikely and too optimistic, given the saturation in its core markets and the fact that the company already has a lot on its plate to operate effectively. Nonetheless, in this hypothetical scenario, the stock is likely fairly valued right now with a higher EV-to-EBITDA terminal multiple and perhaps even a higher EBITDA margin than 55% by 2034. This very bullish outcome would warrant further buying at this time, but these results are somewhat speculative, meaning that conservative value investors wanting to allocate as rationally as possible will wait for a more suitable valuation to increase or initiate positions in Meta.

Conclusion: Hold

While Meta delivered strong Q3 results, it’s not the right time to initiate a position in the company, given that its enterprise value offers a negative 20.5% margin of safety. Long-term, value-oriented growth investors should look toward Google (GOOGL) (GOOG) and Microsoft (MSFT) at this time, as both of these offer compelling valuations and robust long-term growth horizons. For now, Meta stock is a Hold, primarily based on the company’s present valuation.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOGL 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.

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