Ahead of Earnings, Is Meta Stock a Buy, a Sell, or Fairly Valued? (2024)

Watching Threads, AI, and Reels for clues after Meta stock’s big 2023 rally.

Meta Platforms META is scheduled to release its second-quarter earnings report on July 26 after the close of trading. Here’s Morningstar’s take on what to think of Meta’s earnings and stock.

Key Morningstar Metrics for Meta

• Fair Value Estimate: $278.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What to Watch in Meta’s Earnings

• We’ll be looking for the impact of cost cuts and hopefully more efficient operations during the quarter. In regard to artificial intelligence, which Meta has become active in, we’d like to see whether management will continue to focus on cost control or increase spending due to the emergence of generative AI.
• There will likely be an update on Threads. Look not only for a user count but also any color about user engagement (the ratio of daily average users to monthly average users), even though the app was launched only recently. In addition, we’d like to know if the firm plans to monetize Threads, and if so, when.
• Look for more color on the firm’s long-term AI strategy, and whether it’s in line with its long-term metaverse strategy or is more prioritized. We think AI is an important component of the metaverse.
• To what extent is generative AI helping monetize WhatsApp? We would like to see Meta progress a bit more toward diversifying its revenue and reducing its dependence on advertising.
• In terms of Facebook and Instagram, look for any further indications of how the Reels monetization is progressing, and whether the revenue it generates is increasing the firm’s average revenue per user.
• Lastly, as always, we look for user growth. There shouldn’t be anything significant, as the overall user base (which is in the billions) is no longer likely to grow much; the rate may possibly be only a very low single digit.

Fair Value Estimate for Meta Stock

With its 3-star rating, we believe Meta’s stock is fairly valued compared with our long-term fair value estimate.

The stock has performed very well and is now trading above our fair value estimate of $278. We’ve valued Meta at $260 or higher even when the stock was trading in the low $90 range late last year. Our fair value estimate is $278 per share, representing an enterprise value of 14 times our 2023 adjusted EBITDA projection. We have modeled 10% average annual growth over the next five years.

As the firm plans to further invest in research and development, content creation, data security, and virtual/augmented reality offerings (or the metaverse), we see the average operating margin declining further in 2023, after which it likely will expand as revenue growth accelerates. We expect an average operating margin of 31% during the next five years, below the previous three years’ 34%.

Meta’s revenue growth will be driven primarily by online advertising and the increasing allocation of online ad dollars toward mobile, video, and social network ads. We expect slight growth in 2023 ad revenue (7%) but model 10.2% growth in 2024, assuming an economic rebound and improvement in Reels monetization. We expect Meta’s monthly active users to grow about 3% annually, mainly due to international growth. We also assume deceleration in overall advertising revenue per user growth to 7% per year over the next five years, down from the average of 14% displayed over the past five years.

Read more about Morningstar’s fair value estimate for Meta stock.

Economic Moat Rating

We assign Meta a wide moat rating based on the network effects of its massive user base and its intangible assets, which consist of a vast collection of data users have shared on the firm’s various sites and apps. Given the company’s ability to profitably monetize its network via advertising, we think Meta will more likely than not generate excess returns on capital over the next 20 years.

Now that Meta has emerged as the clear-cut social media leader, we believe that its offerings—consisting mainly of Facebook, Instagram, Messenger, and WhatsApp—have strengthened its network effects. All these platforms become more valuable to Meta’s users as people both join the networks and use these services. These network effects create barriers to success for new social network upstarts, as well as barriers to exit for existing users, who might leave behind friends, contacts, pictures, memories, and more by departing.

Read more about Meta’s moat rating.

Meta Stock’s Risk and Uncertainty

We believe that while barriers to exit may be increasing for Meta’s nearly 3 billion users, the risk remains of another disruptive and innovative technology (most recently TikTok) luring users away. We do not expect competition in the form of a substitute for Meta, as most consumers use more than one social media network. However, given the fixed number of hours per day, an increase in usage and engagement on one network could come at a cost to others, reducing user engagement and the potential return on investment for advertisers.

Furthermore, even with Meta’s dominance in the market, its high dependence on the continued growth of online advertising could heighten the negative impact of a lengthy downturn in online ad spending, resulting in a much lower fair value estimate.

The firm’s high dependence on user behavior data also represents an environmental, social, and governance risk. Limitations could be imposed by regulatory agencies around the world on what data Meta can compile and how that data can be utilized. A lack of data privacy and security, along with data misusage, could negatively affect users.

Read more about Meta’s risk and uncertainty.

META Bulls Say

• With more users and usage time than any other family of social networks, Meta provides the largest audience and the most valuable data for online advertising in the business.
• Meta’s ad revenue per user is growing, demonstrating the value advertisers see in working with the firm.
• The application of AI technology to Meta’s various offerings, along with the launch of VR products, will increase user engagement, driving further growth in advertising revenue.

META Bears Say

• Meta is currently a one-trick pony and will be affected severely if online advertising no longer grows or if more advertising dollars shift to others like Google or Snapchat.
• Despite rapid user growth, many of Meta’s customers may also belong to other social networks, such as Snapchat or TikTok, so the firm will continually have to fight to capture a user’s time and engagement with its properties.
• Regulations could emerge that limit the application and collection of user and usage data, or restrict acquisitions, affecting data utilization and growth.

This article was compiled by Tom Lauricella.