Meta Stock, The Must-Own Of The Mag 7

Summary:

• Is Meta Platforms, Inc. the dominant “mag 7” stocks?
• Meta Platforms user growth metrics are still increasing, but hitting a plateau in developed nations, with daily active users up 6% YoY and monthly active users up 3% YoY.
• Ad impressions will be the key report moving forward.
• How many people actually purposely interact with ads versus accidentally?
• Should you chase Meta Platforms stock?

Meta Platforms, Inc. (NASDAQ:META) was one of the must-own stocks for the long term for our investing group, and we think it is “THE” must-own of all the Magnificent 7. Yes, after the year of efficiency drove exceptional operating margin and earnings improvement, the stock has steadily rallied. But with the just-reported Q4 earnings, the company has cemented its dominance among the Mag 7 stocks. Shares are now up 20% following the just-reported earnings.

We believe Meta shares are a buy, but recognize that if you have been on the sidelines, you have missed out. With the massive surge in shares, from a position sizing perspective, it may be prudent to trim a small amount so that it does not take up too large of a size of a position. However, we saw shares heading to $500 this year, and now that is within our sights already. Not only is operational performance tremendous, but now shareholders are getting rewarded with added buybacks and the initiation of an inaugural dividend.

What a chart:

This certainly moved heavily after being a top 2023 pick, but the gains we have seen over the first month and two days of 2024 are just astounding. Is it justified?

Believe it or not, the number of people using the Meta platforms continues to grow, even though you may think that Meta has reached saturation levels. For the most part, saturation is close in the most developed nations, though there is room for growth in emerging markets. However, because the user growth metrics are starting to hit the low single-digit mark going forward, in part due to saturation, Meta will now be reporting ad impressions going forward. This is an interesting change, as we have become accustomed to the daily active (“DAU”) and monthly active user (“MAU”) reporting schemes.

When considering the latter, the growth persists. In December 2023, we saw daily active people on the platforms of 3.19 billion on average, up 8% from December 2022. Monthly active people were 3.98 billion, an increase of 6% year-over-year across the family of platforms. In terms of users, we are nearing a plateau in our estimation, with average daily active users of 2.11 an increase of 6% year-over-year, while monthly active users were up 3% to 3.07 billion.

Going forward, ad impressions will be the reporting highlight. On that front, ad impressions increased by 21% year-over-year across all the apps, while the average price per ad increased by 2% year-over-year. For all of 2023, ad impressions increased by 28% year-over-year, but earlier in 2023 ads were a bit cheaper, so the average price per ad decreased by 9% year-over-year.

Now here is one risk that we are considering. User experiences and tolerance levels vary. The more ads are being served, the more it could reduce the user experience. In addition, one thing that is not reported to advertisers regarding the advertising interactions is how many people “accidentally” clicked on the ads. In anecdotal research, a very unscientific poll around our office, we asked staff and staff in neighboring offices if they have ever intentionally clicked on an ad to learn more. Just 2 of 27 people surveyed indicated they had intentionally interacted with an ad to learn more about a service or product. This is just 7%. However, 26/27 responded that they accidentally clicked on an ad before, or 96%.

Now, we do not read too much into this, as it is a microscopic sample size and informal, but one can cautiously extrapolate this for further research. Our takeaway is simple. A lot more people accidentally interact with ads than intentionally. Ultimately, advertisers may not even care about this, because just getting the eyeballs on their service or product to put it into consumers’ minds is a win. In full disclosure, we have also purchased ads on Meta Platforms, while being investors. How very Peter Lynch of us.

So, that interesting consideration aside, the financial numbers speak for themselves. After the year of efficiency, we have seen tremendous gains. Total Q4 revenue was $40.11 billion and $134.90 billion for the year, an increase of 25% and 16% year-over-year, respectively. Now here is the beauty of the efficiency efforts. While revenues are up significantly, total costs and expenses were down 8% year-over-year in Q4 hitting $23.73 billion. Costs were about flat from 2022 at $88.15 billion for the full year. This is a major win. On top of this, the staffing headcount is down 22% from a year ago to 67,317, saving additional costs.

The company is also aggressively pursuing AI initiatives to further control costs and optimize its advertisements. They are a major customer of NVIDIA Corporation’s (NVDA) high-end chips. We expect this to further improve the operating margin going forward, and may further impact the need for staff. However, this will lead to increased infrastructure-related spending in 2024. Still, the forward look is mightily impressive, which is why continue to see it as they must own the Mag 7. Q1 revenue is seen at 35.75 million at the midpoint, up from $28.65 billion in Q1 a year ago. That is simply impressive. Considering efficiency in costs, Capex considerations, losses in Reality Lab investments, and infrastructure costs, we see EPS hitting $4.40 in Q1.

Need more reason to own shares other than the significant growth? Well, Meta’s board approved and declared a cash dividend of $0.50 per share payable on March 26, 2024, to shareholders on record as of February 22, 2024. While the “income” is really a token in terms of yield, the company intends to pay a quarterly dividend moving forward, an added bonus to holding shares. Further boosting shareholder value will be ongoing repurchases. There were $20.03 billion worth of repurchases in 2023. The company just boosted the authorization to another $50 billion.

Take home

This report was everything we could have asked for and more. Meta has cemented its spot as the top dog in the Mag 7 in our opinion. While risks to the user experience persist, and Reality Labs continues to burn cash, it is a long-term investment. Meta has been one we own, and do not really trade. However, we will shave mildly the position just given the value of the position has grown under a prudent portfolio management strategy.

It is tough to chase the stock here if you are on the sidelines. But believe it or not, the valuation is not all that stretched. We could see over $20 in EPS this year, so even at $470 per share, that is 23X FWD. Compared to other high-growth tech, or even other Mag 7 names, Meta Platforms, Inc. is still attractively valued. We think dips in the market that knock the stock back should be bought.

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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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