/Facebookname%20backlite%20by%20Alex%20Haney%20via%20Unsplash.jpg)
Shares of Meta Platforms (META) took a breather last week after surging over 500% in the last two years. The social media giant, valued at a market cap of $1.42 trillion, fell more than 4% following its Q3 results last week.
Let’s see how Meta Platforms performed in Q3, and whether the tech stock is still a good buy at current levels.
Meta Platforms Crushes Estimates in Q3
Meta Platforms reported revenue of $40.59 billion with adjusted earnings of $6.03 per share in Q3 of 2024, compared to estimates of $40.29 billion and $5.25 per share, respectively. While Meta beat Wall Street projections in Q3, the stock declined after it posted weaker-than-expected user numbers and said that its capital expenditures would accelerate over the next 15 months.
Despite its massive size, Meta grew its sales by 19% year over year. A focus on cost efficiencies enabled it to grow earnings by 35% to $15.7 billion in the September quarter. Notably, this was the company’s slowest YoY earnings growth in the last five quarters. The number of daily active people across its Family of Apps, including Facebook, Instagram, and Threads, stood at 3.29 billion, up 5% year over year. However, that was lower than estimates of 3.31 billion.
Meta continues to invest heavily in artificial intelligence (AI), and raised its capital expenditure guidance to between $38 billion and $40 billion in 2024. These expenses are estimated to grow significantly next year as Meta aims to gain an early-mover advantage in the AI segment.
In recent months, Meta has purchased billions of dollars worth of Nvidia’s (NVDA) graphics processing units while building data centers to support AI-related infrastructure. On the earnings call, Meta CEO Mark Zuckerberg claimed that more than a million advertisers have used its AI-powered ad tools. In Q3, Meta grew its ad sales by 18.7% to $39.9 billion. Meta is the world's second-largest digital ad company, generating 98.3% of its top line from online advertisements.
At the midpoint estimate, Meta forecast Q4 sales at $46.5 billion, marginally higher than consensus estimates of $46.3 billion.
Reality Labs Continues to Burn Cash
Meta entered the virtual reality market a decade ago, and acquired Oculus for $2 billion. Formerly called Facebook, Meta changed its name three years back, showcasing its ambitions to build a “Metaverse.” The company has been spending vast sums of money to support its lofty goals, given that Reality Labs has reported close to $60 billion in losses in the last four years.
Meta’s Reality Labs segment reported an operating loss of $4.4 billion, below estimates of a $4.68 billion loss. Its sales rose by 29% to $270 million, lower than estimates of $310.4 million. The Reality Labs business develops augmented and virtual reality products and solutions. It generates a bulk of its revenue from selling Quest VR headsets and smart glasses.
Is Meta Stock Undervalued?
A key reason for Meta’s market-thumping rally is its free cash flow expansion. Over the past two years, Meta has trimmed its workforce, expanding its free cash flow to $52.1 billion in the last four quarters, up from $43.8 billion in 2023 and $19 billion in 2022.
Analysts tracking Meta Platforms stock expect adjusted earnings to expand from $14.87 per share in 2023 to $25.18 per share in 2025. So, priced at 23 times forward earnings, META stock is not too expensive.
Out of the 49 analysts covering META stock, 42 recommend “strong buy,” one recommends “moderate buy,” four recommend “hold,” and two recommend “strong sell.” The average target price for META stock is $649.26, indicating an upside potential of 13.7% from current levels.
