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Meta Platforms META released its first-quarter earnings report on April 30. Here’s Morningstar’s take on Meta’s earnings and stock.
Meta kicked off fiscal 2025 with strong financial results and a 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.
Meta Platforms Stock Price
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Fair Value Estimate for Meta Platforms
With its 4-star rating, we believe Meta’s stock is undervalued compared with our long-term fair value estimate of $770 per share, implying a 2025 adjusted price/earnings multiple of 30 times and an enterprise value/adjusted EBITDA multiple of 16 times.
We forecast Meta’s sales growing at a 12% 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.
Drilling deeper, we believe Meta has a strong monetization opportunity ahead of it in Asia and the rest of the world. While we expect advertising sales from North America and Europe to grow steadily, we believe increasingly affluent and growing middle classes in Asia, Africa, and the Middle East will allow Meta to improve its ad monetization in those regions, lifting its overall top line.
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.
We assign a wide moat rating to Meta’s Family of Apps, or FoA, business segment. We believe that the firm has built significant intangible assets, primarily via the customer data it collects and a potent network effect that has enabled Meta to be the most dominant social media platform in the world.
Meta’s FoA segment includes revenue from its social media applications including Facebook, Instagram, WhatsApp, and Messenger. The firm’s dominance in social media is evidenced by its four primary applications constituting four of the six most popular social media applications globally. Also, Meta’s scale in the social media business is staggering. Almost 4 billion people use at least one of its applications every month. For context, according to various estimates, a little more than 5 billion people in the world have access to the internet, implying that around 75% of people connected to the internet globally are users of Meta’s applications.
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 a Morningstar Uncertainty Rating of High. We believe Meta’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.
As we look ahead, 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.
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, allows it access to high-quality user data which it can package and sell to advertisers.The firm has an opportunity to drive more ad inventory growth, leveraging new products such as Threads while also improving its monetization of ads on more nascent features such as 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 US which could potentially force it to break up, severing some of the scale advantages it has built up 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 Jacqueline Walker.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
