Meta’s shares decline as company reveals new, increased spending initiatives

Meta Platforms is (META) is the latest of the Magnificent Seven stocks to report quarterly earnings. Here’s what our analyst thought of the company’s update.

Morningstar Metrics for Meta Platforms Stock

• Fair Value Estimate: $400
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Meta’s Earnings

Meta posted a solid first quarter, with revenue growth and management’s second-quarter outlook, while modestly disappointing relative to FactSet consensus, putting the firm on a path to exceed our 2024 revenue expectations. However, the firm increased its budget for both full-year operating expenses and capital spending, with CEO Mark Zuckerberg convinced that the firm should “invest significantly more in the coming years” into artificial intelligence. Zuckerberg expects a big step up in investment before AI services generate meaningful direct revenue. After accounting for faster revenue and expense growth in our forecast, we’re leaving our fair value estimate at $400 per share. With the selloff following the earnings release, we believe the shares are fairly valued.

Total revenue increased 27% to $36.5 billion during the first quarter, with growth accelerating across geographies. Meta served 3.24 billion daily users across its apps during the quarter, up 7% versus a year ago. The volume of ads delivered increased 20% year on year, indicating continued strong growth in engagement thanks to improving content recommendations, a practical benefit of recent AI investment. Meta indicated that more than 50% of the content delivered on Instagram and 30% on Facebook is now AI-recommended. Ad pricing increased 6% year over year, showing continued acceleration from the fourth quarter after nearly two years of declines as advertiser demand remains strong.

Operating expenses increased 6% compared with a year ago, with headcount increasing for the second consecutive quarter. The operating margin expanded to 38% from 25% a year ago. Meta now expects operating expenses to total $96 billion-$99 billion this year, raising the low end of the range of its prior forecast from $94 billion. Capital spending is expected in the range of $35 billion-$40 billion, up from $30 billion-$37 billion previously, and the firm again said that it plans to increase spending further in 2025.

Source link