Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Meta META kicked off fiscal 2025 with a set of strong financial results and better-than-expected outlook for second-quarter sales as ad spending on the firm’s platform remains solid. On the profitability front, Meta’s operating margins expanded 360 basis points in the quarter to 41%.
Why it matters: Meta’s ad business, aided by the firm’s investments in improved ad targeting and content recommendation, continues to show resilience even as macro headwinds affect overall ad spending.
We attribute this resilience to Meta’s superior return on ad spending when compared with smaller peers. We believe these advertisers are reallocating ad dollars from lower-ROAS vendors like Snap, as seen in the firm’s uncertain outlook reported yesterday.Also, in an auction-based pricing model, ad prices are automatically lowered as demand falls, enticing more advertisers looking to place an ad at a cheaper price. This flexibility, coupled with a broad client base, partially insulates Meta’s revenues from dropping sharply.
The bottom line: We are maintaining our $770 fair value estimate for wide-moat Meta and continue to view the firm as exceptionally well-placed to benefit from increased digital ad spending on social networks and from the firm’s improved ad targeting due to its artificial intelligence-related investments.
Investors have shied away from Meta’s stock amid macro uncertainty. As evidenced by Alphabet’s results last week, as well as Meta’s report, large advertising giants are feeling the macro pain less than their smaller counterparts as the latter do not have the same level of ad-targeting sophistication.Despite the positive price action after the earnings report, we continue to view Meta’s stock as undervalued. We think investors are discounting the long-term competitive differentiation and value the firm stands to generate as it monetizes its AI investments.
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