On Wednesday evening, Meta Platforms (META) , the company formerly known as Facebook, released their first quarter financial and operational results. The numbers were better than expected as the firm continues to pursue the increased level of fiscal discipline that had finally become apparent late last year. That change in the firm's fiscal discipline has been the reason behind my change in sentiment regarding META and really the only reason behind the name even having a place in my portfolio.
For the three month period ended March 31st, META posted GAAP EPS of $2.20 on revenue of $28.645B. These top and bottom line results both beat Wall Street quite handily. Revenues not only beat the firm's own guidance, but were good for year over year growth of 2.7%, putting a halt to what had been a streak of three consecutive quarters of contracting year over year revenue generation.
Financials
While revenue increased 2.7%, the cost of that revenue grew 1.7% to $6.108B. However, while the firm was able to cut back on expenses related to marketing and sales, administrative expenses and costs associated with R&D still increased quite aggressively. Thus operating income decreased 15.2% from the year ago comparison to $7.227B. After accounting for interest and taxes, net income decreased 23.5% to $5.709B. If you did not already know, now you do understand why the shares had been stripped of their "growth" style valuation last year.
Operationally
There's some visible improvement here. As you will see though, there is still a tough road to travel. Ad revenue, which is really what META is about, increased 4.1% to $28.1B, while the "Reality Labs", despite the firm's still "new-ish" name, experienced a year over year contraction of 51.2%, generating just $339M. Ad impressions delivered across the family of social media apps increased 26% year over year, as the average price per ad contracted 17% year over year.
There has clearly been a perceived reduction in the effectiveness of placing ads across these platforms ever since Apple (AAPL) gave consumers the option of denying apps on their mobile devices the ability to track them as they traverse the internet.
Taking a look at engagement with the firm's social media businesses, family (of apps) daily active people (DAP) increased 5.2% to 3.02B, as family monthly active people (MAP) increased 4.7% to 3.81B. Facebook (specific) daily active users (DAU) increased 3.9% to 2.037B, while Facebook monthly active users (MAU) increased just 1.8% to 2.989B.
On that usage, family of apps ARPP (average revenue per person) decreased 1.7% to $7.59 as Facebook specific ARPU (average revenue per user) increased 0.8% to $9.62.
Guidance
For the current quarter, Meta Platforms is guiding revenue toward a range spanning from $29.5B to $32B. This places the low end of the range at just about where Wall Street's consensus view had been. The firm also reduced the midpoint of expectations for full year operating expenses from $89B to $88B, as the high end of the range for this metric was brought down from $92B to $90B, and the low end was left in place at $86B.
The firm also reiterated full year expectations for CapEx of $30B to $33B. However, these expenditures will be focused upon building up the firm's capacity for the implementation of generative AI (artificial intelligence) across already existing products such as "Reels" and individual feeds, as well as in support of the ad business, which really is "the" business.
Fundamentals
For the quarter reported, META generated operating cash flow of $13.998. Out of that comes CapEx of $6.823B and principal payments on finance leases of $264M. This left the firm with free cash flow of $6.011B, which was down 19% from the year ago comp, but better than what had been projected.
META does not pay its shareholders a dividend, but did repurchase $9.365B worth of common stock during the first quarter. While it's always difficult for me to condone firms that return more to shareholders (personally, I'd prefer a dividend) than they generate in free cash flow, META has built up a stash of cash and is relying upon that cash position in order to maintain these repurchases. At quarter's end, META still had $41.73B available under its current authorization for the repurchase of common stock.
Turning to the balance sheet, META ended the quarter with a cash position of $37.439B, and current assets of $52.483B. Current liabilities add up to $25.381B, leaving the firm with a quite robust current ratio of 2.07. Total assets amount to $184.491B, including $21.598B in goodwill and other intangibles. At 11.7% of total assets, this is more than acceptable. Total liabilities less equity comes to $59.696B. This includes $9.925B in long-term debt, which is something the firm could pay off out of pocket several times over if need be. This balance sheet is in pristine condition.
Wall Street
Since these earnings were released last night, I have come across 21 sell-side analysts that have both opined on META and are rated at a minimum of four stars (out of five) by TipRanks. Of these, 21 analysts, after allowing for changes, there are 20 "buy" or buy-equivalent ratings and one "hold" rating. The average target price across these 21 analysts is $283.67 with a high of $350 (Mark Mahaney of Evercore ISI) and a low of $220 (Rob Sanderson of Loop Capital Markets). Once omitting these two as potential outliers, the average across the other 19 analysts barely moves, dropping to $283.52.
My Thoughts
The firm is making progress. Cost cutting appears to be serious, as CEO Mark Zuckerberg continues with his "Year of Efficiency", and as Zuckerberg stated, he "no longer thinks that META is behind on AI infrastructure investments." That's huge. It's as if it has finally struck home that building out the Metaverse has to be secondary or even tertiary to keeping the businesses that keep the lights on relevant.
In this environment, that's an AI enhanced focus on advertisement generation. On that note, some readers may have noticed that "reels" shared is up 100% over six months. The firm believes that as much as 20% of all content consumed is driven by AI driven content recommendations. This number is believed to be as much as 40% for Instagram when that app's performance is broken out.
The shares were trading considerably higher (+13%) in early morning trading. One negative is that the shares are no longer inexpensive. META closed last night at 21 times forward looking earnings. That PE ratio will rise this morning. Even though there is clearly progress, I do not see META worthy of a "growth stock" kind of valuation. META is more worthy of a giant, cash flow producing, slow-growth style of valuation, meaning that it should trade more in line with the S&P 500.
This morning's surge is a continuation of the breakout produced by the cup with handle pattern exhibited above with the $198 pivot. I was in the name, not because I love META, but because I had believed in the firm's dramatically improved discipline. My target price is/was $227. I will be taking my profits on this name on Thursday and begin the process of exiting the stock. I was right about this trade. I am not at all sure about this valuation in this environment.
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