Meta (NASDAQ:META) Beats Q4 Sales Targets, Stock Jumps 13%

Full Report / February 01, 2023
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Social network operator Meta Platforms (NASDAQ: META) reported Q4 FY2022 results topping analyst expectations, with revenue down 4.47% year on year to $32.1 billion. The company expects that next quarter's revenue would be around $27.2 billion, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Meta made a GAAP profit of $4.65 billion, down on its profit of $10.2 billion, in the same quarter last year.

Meta (META) Q4 FY2022 Highlights:

  • Revenue: $32.1 billion vs analyst estimates of $31.6 billion (1.49% beat)
  • EPS: $1.76 vs analyst expectations of $2.24 (21.5% miss)
  • Revenue guidance for Q1 2023 is $27.2 billion at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow of $5.28 billion, up from $173 million in previous quarter
  • Gross Margin (GAAP): 74%, down from 81.1% same quarter last year
  • Family Monthly Active People: 3.74 billion, up 150 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.

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 19.8% annually. The initial impact of the pandemic was positive for Meta's revenue, pulling forward sales, but quarterly revenue subsequently normalized, year over year.

Meta Total Revenue

This quarter, Meta reported a rather lacklustre 4.47% year on year revenue decline, in line with analyst estimates.

Meta is guiding for revenue to decline next quarter 2.35% year on year to $27.2 billion, a further deceleration on the 6.63% year-over-year decrease in revenue the company had recorded in the same quarter last year.

Usage Growth

As a social network, Meta can generate revenue growth by increasing user numbers, and by charging more for the ads each user is exposed to.

Over the last two years the number of Meta's monthly active users, a key usage metric for the company, grew 8.09% annually to 3.74 billion users. This is decent growth for a consumer internet company.

Meta Family Monthly Active People

In Q4 the company added 150 million monthly active users, translating to a 4.17% growth year on year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Meta it measures how much it makes off ads served to each user, proxy for how valuable advertisers find its audience and its ad-targeting capabilities.Meta ARPU

Meta’s ARPU growth has been decent over the last two years, averaging 9.84%. The ability to increase price while still growing its user base shows the value of Meta’s platform. This quarter, ARPU shrank 8.3% year on year, settling in at $8.60 for each of the monthly active users.

User Acquisition Efficiency

Consumer internet businesses like Meta grow by a combination of product virality, paid advertisement and occasional incentives, unlike enterprise products that are typically sold by sales teams.

Meta is very efficient at acquiring new users, spending only 16.5% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency is indicative of a combination of scale and a highly differentiated product offering, which gives Meta the freedom to invest its resources into new growth initiatives while still maintaining optionality.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

Meta's EBITDA came in at $11.7 billion this quarter, which translated to a 36.6% margin. Over the last twelve months the company has been amongst the handful of the most profitable consumer internet business with EBITDA margins of 37.4%.

Meta Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Meta's free cash flow came in at $5.28 billion in Q4, down 57.9% year on year.

Meta Free Cash Flow

Meta has generated $18.4 billion in free cash flow over the last twelve months, 15.8% of revenues. This strong FCF margin is a result of Meta asset lite business model and provides it plenty of cash to invest in the business.

Key Takeaways from Meta's Q4 Results

Sporting a market capitalization of $390 billion, more than $40.7 billion in cash and with positive free cash flow over the last twelve months, we're confident that Meta has the resources it needs to pursue a high growth business strategy.

Meta has reported results mostly in-line with analysts' estimates. And it topped analysts’ revenue expectations this quarter, even if just narrowly and user numbers are still growing. On the other hand, revenue has declined in absolute numbers. Overall, this quarter's results were decent, especially considering the numbers reported by Snap yesterday. The company is up 13% on the results and currently trades at $173.1 per share.

Is Now The Time?

Meta may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that Meta is not a bad business. However, its revenue growth has been a little slower over the last three years, and analysts expect growth rates to deteriorate from there. But while its ARPU is growing slowly, the good news is its impressive EBITDA margins show massive profitability of the business.

At the moment Meta trades at next twelve months EV/EBITDA 8.3x. In the end, beauty is in the eye of the beholder. While Meta wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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