We see Meta’s Q1 earnings-related stock slide as an opportunity
Meta Platforms on Wednesday evening delivered a solid quarter with sales, operating income, earnings, and cash flow all exceeding expectations on the back of a solid increase in engagement. The stock, however, dropped sharply in after-hours trading following some guidance concerns. Revenue in the three months ended March 31 rose 27% year over year to $36.455 billion, topping the $36.156 billion expected by analysts, according to estimates compiled by LSEG. Earnings per share in the first quarter more than doubled year-over-year, coming in at $4.71, exceeding the Street’s $4.32 EPS estimate. Unfortunately, a light current quarter sales forecast and an increase in the management’s full-year capital expenditures and the lower end of the total expense range knocked the stock down roughly 15.5%. That’s certainly going to take a bite out of near 40% year-to-date gains, as of Wednesday’s close of $493. But remember, Meta shares just about tripled in 2023. META YTD mountain Meta Platforms YTD We obviously don’t like what we are seeing after hours in the stock. But, we understand the motive to lean into the investments here and remind members that betting against Zuckerberg when it comes to things like this has historically not been a great proposition. We think that’s especially true this time around, given that leading in AI will not only increase existing streams but also result in entirely new ones. The selloff we’re seeing does, however, speak to the notion of discipline trumping conviction, a view we have always held and one that led us to book profits back in March at roughly $490 a share, a move that allows us to view this pullback a bit more constructively as it provides us an opportunity to buy back shares once the stock settles down a bit. In recognition of post-earnings pullback, we’re upgrading the stock back to our buy-equivalent 1 rating , which we believe is the result of short-term thinkers who can’t see the forest for the trees. We are, however, reducing our price target to $525 per share from $550 given the outlook worries. Bottom line Meta delivered a fantastic set of results as far as the first quarter is concerned. However, it’s management’s outlook that hit the stock. On the call, CEO Mark Zuckerberg explained that increased investments are necessary to scale out the company’s artificial intelligence models and services. He added, “As we’re scaling capex and energy expenses for AI, we’ll continue focusing on operating the rest of our company efficiently but realistically even with shifting many of our existing resources to focus on AI, we’ll still grow our investment envelope meaningfully before we make much revenue from some of these new products.” While these comments did result in a second leg down for the stock after hours, Zuckerberg was quick to point out that shares generally see increased pressure when the company is working to scale out new products but has yet to reach the monetization phase. “We saw this with Reels, Stories, as News Feed transitioned to mobile, and more,” he stated. Meta Platforms Why we own it : We value Meta Platforms for its targeted advertising dominance. Deep user engagement also creates a flywheel effect between users and content producers/marketplace sellers. The company’s scale provides the financial power and employee talent needed to ensure new growth avenues such as artificial intelligence, the metaverse and virtual and augmented reality projects. We like management’s intense focus on cost controls. Competitors : Alphabet, TikTok (owned by China’s ByteDance) and Snap Weight in portfolio : 4.78% Most recent buy : Sept. 6, 2022 Initiated : May 29, 2014 We rode out all three of those noted product investing and ramp-up cycles. Each time, we looked ill-informed as the bears yelled that the best days were in the past and the business model was getting disrupted. The naysayers doubted Zuckerberg’s ability to adapt and overcome. We didn’t and we’ve been greatly rewarded. We think patience this time will once again be rewarded. While expecting a similar dynamic to play out now with AI investments, Zuckerberg fully expects the end result to be similar as the team scales its offerings and then begins to monetize the investments. “Historically investing to build these new scaled experiences in our apps has been a very good long-term investment for us and for investors who will stuck with us, and the initial signs are quite positive here too,” the co-founder and CEO said. This investment cycle is expected to take longer than others, “several years” according to Zuckerberg. However, the opportunity to lead in the age of AI, arguably has a greater potential payoff than any of those other past investment cycles. Indeed, during the Q & A session, when asked about what has changed in terms of the team’s views on AI that causes the expense outlook to increase versus three months ago, Zuckerberg said, “I think we’ve gotten more optimistic and ambitious on AI. … [When] we released LLaMA 2, we were very excited about the model and thought that that was going to be the basis to build several things that were valuable to integrate into our social products. But now, I think we’re in a pretty different place. So, with the latest models, we’re not just building good AI models that are going to be capable of building some new good social and commerce products. I actually think we’re in a place where we’ve shown that we can build leading models and be leading AI company in the world.” That’s not to say that any payoff will still be several years away. Current products do stand to benefit nearer-term — maybe not in the next one or two quarters but it’s not five years off either, according to Zuckerberg. As an example, the CEO spoke about the cost of engagement being too high for creators and businesses: AI stands to “dramatically” reduce the cost of engagement — think AI agents fulfilling basic customer engagement opportunities that are currently being passed up. As these AI offerings drive down the cost of engagement, the tools themselves also lend to additional revenue streams for Meta, specifically as it relates to the monetization of messaging apps Messenger and WhatsApp. What it comes down to is Zuckerberg acknowledging that AI investments will certainly strengthen the company’s current Family of Apps, leading to revenue and earnings growth over time, but it would be crazy to invest in technology such as AI and not seek to apply it to solutions beyond current offerings. The company’s connected RayBan sunglasses is one example. After all, why shouldn’t LLaMa 3, the company’s flagship large language model, be in the conversation with ChatGPT from Microsoft-backed OpenAI or Alphabet’s Gemini? Meta surely knows as much about its over three billion users as Microsoft and Alphabet do their users. Just imagine if General Electric invested in electricity in the 1800s only to apply it to the incandescent light bulb without exploring the other applications of electricity. Meta is in a position to lead, and they must not squander it. AI isn’t the only catalyst. As Jim Cramer said during the Club’s April Monthly Meeting , Meta has the biggest tailwind on Earth being dangled in front of it — the newly signed law that says Chinese company ByteDance must sell TikTok or face a U.S. ban on the short-form video platform. The bill gives ByteDance nine months to sell — or up to a year if President Joe Biden were to invoke a 90-day extension that’s built into the law — or face a nationwide ban. Jim has been saying for months now that Meta’s similar short-form service Reels stands to benefit most from a TikTok ban. Guidance Meta expects second-quarter 2024 revenue to be between $36.5 billion and $39 billion, short at the midpoint compared to consensus expectations of $38.254 billion, according to FactSet. Compounding the light revenue guide, Full-year capital expenditures are projected to fall in a range of $35 billion to $40 billion, up from the previous $30 billion to $37 billion range, and above the $34.7 billion the Street was modeling. As a result, full-year total expenses are now projected to be between $96 billion and $99 billion, an increase of $2 billion on the low end and above the $94.15 billion expected, according to FactSet. Quarterly commentary The reported Q1 results were quite good. Though Family of Apps operating income came in a bit light at $17.66 billion, it was more than offset by a smaller-than-expected loss in Realty Labs of $3.85 billion. The operating margin of 37.9% was strong, as was free cash flow of $12.53 billion. We expect the increased focus to be put on cash flows, given management’s intent to invest more heavily in AI but have faith – especially given last quarter’s dividend announcement – that the team has not forgotten the importance of operating efficiently and investing only where there are attractive high probability opportunities for strong returns on those investments. Family Daily Active People (DAP) growth looks solid to 3.24 billion, and even better is the increase in the Average Revenue Per Person (ARPP) to $11.20. Though the team did stop providing other engagement metrics, they are now offering up impression and advertising price results (not on the chart). Worldwide, ad impressions delivered increased 20% year-over-year with growth seen in all key geographies. Moreover, the average price per ad increased 6% worldwide, with a small decline in the Asia-Pacific region more than offset by increases everywhere else. Regarding shareholder returns, the company repurchased $14.6 billion worth of stock during the quarter while returning another $1.3 billion via dividends. (Jim Cramer’s Charitable Trust is long META, MSFT, GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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The logo of the U.S. company created by Mark Zuckerberg, Meta is displayed during the Viva Technology conference at Parc des Expositions Porte de Versailles on June 15, 2023 in Paris, France.
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Meta Platforms on Wednesday evening delivered a solid quarter with sales, operating income, earnings, and cash flow all exceeding expectations on the back of a solid increase in engagement. The stock, however, dropped sharply in after-hours trading following some guidance concerns.