Meta Platforms: Don’t Fret The AI Capex, Stay The Course

Summary:

• In light of its Q3 2024 report, Meta Platforms, Inc. stock plunged by over 5% in today’s session, despite beating street estimates on top and bottom lines.
• With Q4 sales guidance falling a little short of estimates, Zuckerberg & Co. returning to free spending ways seems to be rocking the boat for some investors.
• However, Meta is delivering exceptional business performance, and remains an attractively valued cash printing machine!
• In this note, I provide an updated valuation for META that suggests buying at current levels. Read on to learn more.

Introduction

I last covered Meta Platforms, Inc. (NASDAQ:META) in April 2024, rating the social media/digital advertising giant a “Buy” amidst a significant post-ER dip:

While I expected META stock to fill out the gap at $400-450 in the near term, a ~16% post-ER plunge to the low-$400s was definitely not on my prediction list for the Q1 earnings season.

Given the ferocious drop in the stock, one would assume Meta’s business is collapsing; however, the reality is that Meta just grew revenues at 27% y/y and EPS at 114% y/y in Q1 2024, beating consensus estimates on both top and bottom lines. Yes, Meta’s stock has rebounded back to the mid-$400s since that initial post-ER plunge, but we are still lower by more than 10% from pre-earning levels.

As you can see below, our updated fair value estimate for Meta is ~$511 per share (or $1.34T market cap), a significant upgrade from our previous evaluation of $367 per share. While Meta’s robust business performance and humongous stock buyback program are significant drivers, the bulk of this upgrade is driven by a change in terminal growth rate assumption from 3% to 5% based on an improved long-term outlook for Meta AI and an impending TikTok ban in the US.

While the Metaverse spending may or may not result in the next big computing platform[s], I believe the accelerated AI infrastructure spending from Meta will deliver massive ROI in the long run as Meta’s GenAI monetization path is clearer than many other big spenders in AI.

Assuming a base case P/FCF (exit) multiple of ~20x, I see Meta’s stock rising from $443 to $1,010 per share at a CAGR rate of ~18% over the next five years.

With Meta’s 5-year expected CAGR exceeding our investment hurdle rate of 15%, META stock remains a “Buy” currently under our valuation process. While Meta’s long-term risk/reward is certainly not as attractive as it was a few months ago (or in the $90s during 2022 when I was buying hand over fist), Meta’s core social media/digital advertising assets are incredible cash printers and ambitious long-duration projects like Meta AI (Llama3 & future AI models) and Metaverse (Smart Glasses, Quest Headsets, etc.) provide a long runway for growth.

Given Meta’s increased AI Capex spending guide, I wouldn’t be surprised to see more volatility in META stock. However, I think the ongoing drawdown in META is a buying opportunity for long-term investors. Meta is one of our largest positions, and we will be resuming slow, staggered accumulation at our next bi-weekly deployment.

Key Takeaway: I rate Meta a “Buy” in the low-to-mid-$400s, with a strong preference for staggered accumulation.

Source: Meta: Don’t Speculate, Just Accumulate.

Since then, META stock has handily outperformed the broader market [S&P-500 (SPY)], rallying by more than 32% after factoring in today’s -4% post-Q3 dip to $568 per share.

In today’s note, we will briefly review Meta’s Q3 2024 report. Furthermore, we will re-evaluate Meta’s fair value and expected return to make an informed investment decision on the stock. Let’s go!

Breaking Down Meta’s Q3 2024 Report

For Q3 2024, Meta reported a minuscule top-line beat, with revenues coming in at $40.59B [up +19% y/y] vs. consensus estimates of $40.31B. While Family DAP growth of 5% y/y was slightly below market expectations, Meta’s user growth remains healthy along with other key operating metrics, i.e., Ad Impressions (+7% y/y) and Average price per Ad (+11% y/y) as of Q3.

Despite increased AI CAPEX spending and a +9% y/y increase in its headcount to 72.4K, Meta generated $15.52B in free cash flow in Q3 2024. Of this, Meta returned $10.12B to shareholders via share buybacks [$8.86B] and dividends [$1.26B] during Q3 under its shareholder-friendly capital return program.

As of the end of Q3 2024, Meta’s cash & short-term investments stood at ~$71B, against long-term debt of ~$29B, reflecting a solid financial foundation for Meta as it continues to spend aggressively on AI Infrastructure and Reality Labs next quarter and in 2025.

Why is META stock reacting negatively to its Q3 report?

For starters, the midpoint of Meta’s Q4 revenue guidance range of $45-48B, i.e., $46.5B, fell slightly short of pre-ER Q4 consensus estimates of $46.63B. Furthermore, Meta’s leadership tightened up the FY-2024 CAPEX range to $38-40B (from the previous guide of $37-40B) while penciling significant capital expenditure growth in 2025.

While shareholders have made peace with Meta’s exorbitant spending on the Metaverse [after the “Year of Efficiency” [2023] saw Meta cutting costs elsewhere to boost profitability], Meta’s capital expenditure growth outlook for 2025 is likely sending some jitters through its shareholder base as ROI concerns remain top of mind.

Now, the Reality Labs/Metaverse spending may or may not result in the next big computing platform[s]. I believe the accelerated AI infrastructure spending from Meta will deliver massive ROI eventually, as Meta’s GenAI monetization path is clearer than many other big spenders in AI. In Meta AI (powered by Llama3), Meta has built a powerful competitor to OpenAI’s ChatGPT, and Zuckerberg & Co. have plans to disrupt the “Search” landscape. Given that 3.3B people already use Meta’s platforms, the data, and distribution advantage held by Meta is likely to result in the social-media giant taking a big piece of the GenAI market. While short-term investors are likely to get upset about increased AI spend at Meta, I am optimistic about the long-term reward on offer.

Concluding Thoughts: Is META Stock A Buy, Sell, Or Hold?

With 2024 coming to an end, I am using Meta’s 2024E revenue of $162.3B as the base for today’s valuation exercise, holding all other assumptions from our previous assessment.

According to TQI’s Valuation Model, META’s fair value has moved up from ~$511 per share (or $1.34T market cap) to ~$587 per share (or $1.53T market cap) over the past six months on the back of robust business performance and humongous stock buybacks.

Assuming a base case P/FCF (exit) multiple of ~20x, I see Meta’s stock rising from $568 to $1,148 per share at a CAGR rate of ~15.1% over the next five years. With Meta’s 5-year expected CAGR meeting our investment hurdle rate of 15%, META stock remains a modest “Buy” under our valuation process.

Key Takeaway: I continue to rate META stock a “Buy” in the mid-$500s.

Thanks for reading, and happy investing. Please share your thoughts, concerns, and/or questions in the comments section below.

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

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