After Earnings, Is Meta Stock a Buy, a Sell, or Fairly Valued?

Meta Platforms META released its third-quarter earnings report on Wednesday, Oct. 29. Here’s Morningstar’s take on Meta’s earnings and stock.

Key Morningstar Metrics for Meta Platforms

What We Thought of Meta Platforms’ Q3 Earnings

Meta reported solid third-quarter earnings, with sales up 26% to $51 billion and operating margins contracting 300 basis points to 40%, as artificial intelligence-related costs rose year over year. The firm indicates that its capital expenditures, mostly on AI, will be over $100 billion next year.

Why it matters: Meta’s ad business continues to perform exceptionally well, with management attributing improvements in engagement and monetization to the firm’s increased use of AI, as well as continued ad inventory (Threads, WhatsApp) growth, and strong engagement (Facebook, Instagram).

• Meta has two primary levers of driving ad sales: volume and price. On volume, the firm can increase its ad inventory, that is, the number of ads shown, by adding more surfaces and by increasing its user count. To this end, we saw an impressive 8% growth in daily users to 3.54 billion.
• On price, we see Meta’s AI investments as key to driving higher value to advertisers via improved ad targeting and higher returns on ad spending, which then drives higher ad prices. This dynamic was evident in the 10% increase in ad prices, mostly driven by improved ad performance.

The bottom line: We maintain our $850 fair value estimate for wide-moat Meta, with the firm’s strong performance offset by the higher-than-expected capital and operating expenditures commentary for 2026. With shares trading down after hours, we continue to view them as undervalued.

• We understand investor fears around investments in AI. After a scarring Reality Labs misallocation of capital, investors are again doubting Meta’s capital allocation strategy for AI. We are not as pessimistic.
• From a strategic perspective, we think it is important that Meta invests in its own foundation models. Simply put, the costs of running someone else’s model at Meta’s scale are not economically feasible and would cause material margin compression.

Fair Value Estimate for Meta Platforms

With its 4-star rating, we believe Meta’s stock is moderately undervalued compared with our long-term fair value estimate of $850, which implies a 2025 adjusted price/earnings multiple of 31 times and an enterprise value/adjusted EBITDA multiple of 16 times. We forecast Meta’s sales growing at a 14% compound annual growth rate for the next five years, spearheaded primarily by an increase in average revenue per user, with user growth also chipping in.

We remain impressed by Meta’s ability to drive efficiency across its operational footprint, with the firm’s 2024 operating margins of 42%, up from the 2022 nadir of 25%. Looking ahead, we believe that the firm’s profitability will deteriorate, with operating margins declining to 38% over our explicit five-year forecast as increased compensation and depreciation costs eat away at the strong top-line growth.

Read more about Meta Platforms’ fair value estimate.

Economic Moat Rating

We believe Meta merits a wide economic moat rating due to the firm’s intangible assets and the potent network effect around its Family of Apps business. While the firm’s Reality Labs segment continues to hemorrhage cash, we believe Meta’s FoA business’ strong competitive advantages will likely allow the firm to generate returns in excess of its cost of capital over the next two decades.

Read more about Meta Platforms’ economic moat.

Financial Strength

We view Meta’s financial position as rock-solid. The firm closed out fiscal 2024 with cash and cash equivalents of $78 billion, more than offsetting its debt balance of $29 billion. While the firm’s investments in AI stand to increase its capital expenditure considerably over the next few years, the firm’s advertising business remains a cash-generating machine, churning out tens of billions of dollars of free cash flow on an annual cadence.

Read more about Meta Platforms’ financial strength.

Risk and Uncertainty

We assign Meta an Uncertainty Rating of High. We believe the firm’s investments in unprofitable ventures such as generative AI and Reality Labs add a layer of uncertainty around its business, even as its large and stable advertising business continues to generate substantial cash flows in our forecast.

We believe Meta’s considerable scale and intangible assets, such as its ad-targeting algorithms, will most likely enable the firm to maintain its dominance in the social media application space. While there are antitrust concerns around Meta’s business, with US antitrust regulators pursuing a monopoly case against the firm, we view an often-hypothesized breakup of Meta’s applications into separate businesses as unlikely. At the same time, there is headline risk that the firm faces as the case moves through the courts with a trial likely starting in 2025.

The firm’s high dependence on user behavior data represents an environmental, social, and governance risk. If it fails to maintain adequate data privacy and security, Meta’s advertising business will likely suffer. Also, the broader impact of social media on its users’ mental health, especially that of teenagers, is also a pertinent ESG risk for Meta. There appears to be bipartisan support in the US for increased regulation of social media platforms that could include forcing Meta to change its content recommendation algorithms, potentially hitting the firm’s advertising business.

Read more about Meta Platforms’ risk and uncertainty.

META Bulls Say

• Meta’s core advertising business has benefited greatly through improved ad targeting and content recommendation algorithms as well as a secular increase in digital advertising spending.
• Meta’s scale—with the majority of the world’s internet-connected users accessing its applications—gives it access to high-quality user data, which it can package and sell to advertisers.
• The firm can drive more ad inventory growth, leveraging new products such as Threads while improving its monetization of ads on more nascent features like Stories and Reels.

META Bears Say

• Meta’s investments in Reality Labs and generative AI stand to lose the firm billions of dollars annually, taking some of the shine off its overall business.
• The firm has a monopoly case against it in the United States which could potentially force it to break up, severing some of the scale advantages it has built over time.
• Meta has disproportionately benefited from increased ad spending by Chinese retailers including Temu and Shein. A slowdown in spending by these firms could hit Meta’s growth.

This article was compiled by Frank Lee.