Meta (NASDAQ:META) Q3 Sales Beat Estimates But Quarterly Guidance Underwhelms

Full Report / October 25, 2023

Social network operator Meta Platforms (NASDAQ:META) reported Q3 FY2023 results beating Wall Street analysts' expectations, with revenue up 23.2% year on year to $34.1 billion. However, next quarter's revenue guidance of $38.3 billion was less impressive, coming in 1.6% below analysts' estimates. Turning to EPS, Meta made a GAAP profit of $4.39 per share, improving from its profit of $1.64 per share in the same quarter last year.

Meta (META) Q3 FY2023 Highlights:

  • Revenue: $34.1 billion vs analyst estimates of $33.5 billion (2.07% beat)
  • EPS: $4.39 vs analyst estimates of $3.63 (21.1% beat)
  • Revenue Guidance for Q4 2023 is $38.3 billion at the midpoint, below analyst estimates of $38.9 billion
  • Free Cash Flow of $13.6 billion, up 24.5% from the previous quarter
  • Gross Margin (GAAP): 81.8%, up from 79.5% in the same quarter last year
  • Family Monthly Active People: 3.96 billion, up 250 million year on year

Famously founded by Mark Zuckerberg in his Harvard dorm, Meta Platforms (NASDAQ:META) operates a collection of the largest social networks in the world - Facebook, Instagram, WhatsApp, and Messenger, along with its metaverse focused Facebook Reality Labs.

The need for connection is foundational to human experience, and remains the driver of Meta’s mission - to connect the world. Through its platforms, users can connect, share, discover, and communicate with family and friends on just about any connected device. Its massive global aggregated audience of over 3 billion users spends over two hours per day on properties.

Meta’s innovative digital ad tools, massive scale, and demographic data have also transformed how businesses operate, allowing a much more granular targeted approach to interacting with customers. Its high return on investment (ROI) advertising tools have allowed millions of new small businesses to spring up by aggregating potential customers online which were previously dispersed to identify and profitably sell to. Meta’s product offerings to businesses have continued to evolve to include commerce and payment functionality, while continuing to create new ad formats and ways to interact.

The company changed its name to Meta Platforms in October 2021 to signal its increased emphasis on building a new computing platform that will evolve how Meta connects people (and advertisers) from a place to share experiences to a place of shared experiences. They introduced a new product segment, Facebook Reality Labs, whose focus is to create immersive technologies (AR/VR) meant to provide new ways to socialize, work, shop, and game.

Social Networking

Businesses must meet their customers where they are, which over the past decade has come to mean on social networks. In 2020, users spent over 2.5 hours a day on social networks, a figure that has increased every year since measurement began. As a result, businesses continue to shift their advertising and marketing dollars online.

Meta Platforms competes with fellow social media advertising platforms like Google (NASDAQ:GOOGL), Snapchat (NYSE:SNAP), Twitter (NYSE:TWTR), and Pinterest (NASDAQ:PINS)

Sales Growth

Meta's revenue growth over the last three years has been solid, averaging 18.8% annually. This quarter, Meta beat analysts' estimates and reported decent 23.2% year-on-year revenue growth.

Meta Total Revenue

Guidance for the next quarter indicates Meta is expecting revenue to grow 18.9% year on year to $38.3 billion, improving on the 4.47% year-on-year decline it recorded in the same quarter last year. Ahead of the earnings results, analysts covering the company were projecting sales to grow 15.1% over the next 12 months.

Usage Growth

As a social network, Meta generates revenue growth by increasing its user base and charging advertisers more for the ads each user is shown.

Over the last two years, Meta's monthly active users, a key performance metric for the company, grew 5.48% annually to 3.96 billion. This growth lags behind the hottest consumer internet apps.

Meta Family Monthly Active People

In Q3, Meta added 250 million monthly active users, translating into 6.74% year-on-year growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Meta because it measures how much the company earns from the ads shown to its users. ARPU can also be a proxy for how valuable advertisers find Meta's audience and its ad-targeting capabilities. Meta ARPU

The company's ability to increase prices while maintaining its monthly active users shows the value of its platform. This quarter, ARPU grew 15.4% year on year to $8.62 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Meta's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 81.8% this quarter, up 2.3 percentage points year on year.

For social network businesses like Meta, these aforementioned costs typically include customer service, data center, and other infrastructure expenses. After paying for these expenses, Meta had $0.82 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.

Meta Gross Margin (GAAP)

Gross margins have been relatively stable over the last year, averaging 80%. Meta's margins are some of the highest in the consumer internet sector, enabling it to fund large investments in product and marketing during periods of rapid growth to stay one step ahead of the competition.

User Acquisition Efficiency

Consumer internet businesses like Meta grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

Meta is extremely efficient at acquiring new users, spending only 12.6% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that it has a highly differentiated product offering and customer acquisition advantages from scale, giving Meta the freedom to invest its resources into new growth initiatives while maintaining optionality.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

Meta's EBITDA was $20.1 billion this quarter, translating into a 58.9% margin. On top of that, Meta's spectacular EBITDA margins over the last four quarters have placed it among a handful of the most profitable consumer internet companies in the world.

Meta Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Meta's free cash flow came in at $13.6 billion in Q3, up 7,784% year on year.

Meta Free Cash Flow

Meta has generated $36.8 billion in free cash flow over the last 12 months, an eye-popping 28.7% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Meta's Q3 Results

With a market capitalization of $804 billion, a $61.1 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Meta has the resources needed to pursue a high-growth business strategy.

It was great to see Meta beat analysts' revenue and EPS estimates this quarter, driven by better-than-expected monthly active user growth. We were also glad it lowered its operating expense projections, showing the measures it took earlier in the year to increase efficiency are working. 

On the other hand, its revenue guidance for next quarter slightly underwhelmed, and it expects higher infrastructure-related costs next year as it increases its investments in servers and data centers (for both AI and non-AI applications). Losses in its AR/VR division, Reality Labs, are also expected to increase meaningfully in 2024. These announcements, however, are nothing new and were already baked into Meta's stock price. 

Overall, this was a good quarter for Meta. The stock is up 4.82% after reporting and currently trades at $313.99 per share.

Is Now The Time?

Meta may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

There are several reasons why we think Meta is a great business. For starters, its revenue growth has been solid over the last three years, and its growth over the next 12 months is expected to exceed that. And while its ARPU is growing slowly, the good news is its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits. On top of that, its impressive gross margins are a wonderful starting point for the overall profitability of the business.

At the moment Meta trades at 9.9x next 12 months EV/EBITDA. Looking at the consumer internet landscape today, Meta's qualities really stand out, and we really like it at this price.

Wall Street analysts covering the company had a one-year price target of $366.5 per share right before these results, implying that they saw upside in buying Meta even in the short term.

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