Meta (NASDAQ:META) Exceeds Q1 Expectations, Stock Soars

Full Report / April 26, 2023
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Social network operator Meta Platforms (NASDAQ: META) reported Q1 FY2023 results topping analyst expectations, with revenue up 2.64% year on year to $28.6 billion. On top of that, guidance for next quarter's revenue was surprisingly good, being $30.8 billion at the midpoint, 4.36% above what analysts were expecting. The company also reduced the outlook for full year expenses and detailed restructuring plans, showing cost discipline. Meta made a GAAP profit of $5.71 billion, down on its profit of $7.47 billion, in the same quarter last year.

Meta (META) Q1 FY2023 Highlights:

  • Revenue: $28.6 billion vs analyst estimates of $27.7 billion (3.57% beat)
  • EPS: $2.20 vs analyst estimates of $1.97 (11.5% beat)
  • Revenue guidance for Q2 2023 is $30.8 billion at the midpoint, above analyst estimates of $29.5 billion
  • Free cash flow of $6.91 billion, up 30.7% from previous quarter
  • Gross Margin (GAAP): 78.7%, in line with same quarter last year
  • Family Monthly Active People: 3.81 billion, up 170 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 18.6% annually. This quarter, Meta beat analyst estimates but reported a rather lacklustre 2.64% year on year revenue growth.

Meta Total Revenue

Guidance for the next quarter indicates Meta is expecting revenue to grow 6.69% year on year to $30.8 billion, improving on the 0.88% year-over-year decline in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 6.66% over the next twelve months.

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 6.76% annually to 3.81 billion users. This is an ok growth for a consumer internet company.

Meta Family Monthly Active People

In Q1 the company added 170 million monthly active users, translating to a 4.67% 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

The ability to increase price while maintaining its monthly active users shows increasing value of Meta’s platform. This quarter, ARPU shrank 1.94% year on year, settling in at $7.52 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 15.3% 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 reported EBITDA of $12.8 billion this quarter, which was a 44.7% margin. Over the last twelve months the company has been amongst the handful of the most profitable consumer internet business with EBITDA margins of 40.2%.

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 $6.91 billion in Q1, down 19% year on year.

Meta Free Cash Flow

Meta has generated $16.8 billion in free cash flow over the last twelve months, 14.3% 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 Q1 Results

Sporting a market capitalization of $532 billion, more than $37.4 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.

We enjoyed the positive outlook Meta provided for the next quarter’s revenue and the reduction in outlook for full year expenses. And we were also excited to see that it outperformed analysts' revenue and operating profit expectations on solid user metrics. On the other hand, it was less good to see that the revenue growth was quite weak. Zooming out, we think this was still a good quarter, showing the company is staying on target. The company is up 9.59% on the results and currently trades at $229.33 per share.

Is Now The Time?

When considering Meta, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. 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 9.0x. 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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