Should you buy Meta stock? Feb 2023

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Meta just released Q4 earnings causing the stock to jump by 22%.

The rise in share price means the company is now valued at 494 billion dollars.

With 41 billion in cash and 10 billion in debt the enterprise value is roughly 463 billion.

Revenue for the fourth quarter came in at 32.1 billion which was a 4% decrease on the year before and net income dropped 55% to 4.7 billion.

Looking at the yearly numbers, full year revenue was 117 billion, a 1% decrease year over year and net income dropped 41% to 23.2 billion. A 23% increase in costs and expenses sent Meta operating margins to just 25%, down from 40% the previous year.

These numbers don’t look great, so why did the stock rally? A few reasons.

First, expectations coming into this report were low and analysts were expecting worse numbers than what we got.

Second, although headline numbers were weak there were some promising signs elsewhere.

Ad impressions in the fourth quarter increased by 23% despite the average price per ad falling by 22%. This suggests Meta is still providing value with its ad network which could lead to higher revenues down the track.

Third, and most importantly, CEO Mark Zuckerberg signaled an increased willingness to drive down costs and provide value to shareholders. Zuckerberg used the word efficiency 31 times on the earnings call and announced another 40 billion dollars available for stock buybacks.

On the negative side, there appeared to be little impact from the Quest Pro headset and losses from the Metaverse segment should still head above 13 billion this year.

So looking at the valuation, Meta is now valued at 4 times revenue, 21 times earnings and 25 times free cash flow. But there are still questions over growth.

If we assume the company, with the help of share buybacks, can grow earnings at 15% per year for the next 10 years and then trade at 25 times earnings. Under that basic scenario, the company would be worth 2.4 trillion in 10 years time for an investment return of 14.8%.

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