Should you buy Meta stock? 3-minute analysis

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Meta stock tanked 25% yesterday after reporting Q3 earnings. The stock is now down 71% year to date and 67% since it changed its name from Facebook.

As a result, Meta now has a market cap of $260 billion. With 41.8 billion of cash on the balance sheet and 9.9 billion of long term debt, the enterprise value is roughly 228.1 billion.

Key highlights from the Q3 earnings was a 19% increase in costs and expenses to 22 billion. This took operating margins for the quarter down 16 percentage points to 20% and net income dropped 52% year on year to 4.4 billion.

Capital expenditures also increased dramatically to 9.5 billion, meaning free cash flow tanked to just 173 million.

In this chart you can see how net income, free cash flow and operating margins have decreased dramatically from the fourth quarter of 2021.

To top things off, Meta provided no indication that costs would slow down with next year's expenses expected to come in at around $100 billion dollars.

These figures mean that trailing twelve month revenue is at 118 billion, net income is 28.8 billion and free cash flow is 25.7 billion. That makes the stock pretty cheap on paper.

At this point a key question for shareholders is what Meta is spending all this money on?

Unlike people seem to think, this money is not all going on the metaverse. The META CFO said on the conference call that increasing AI capacity is driving substantially all our capital expenditure.

In other words, Meta is investing in AI to fight Apple’s app tracking policies and to fend off competition like TikTok.

What’s most worrying about this is that Meta has ramped up spending but only seen an incremental 4% increase in total revenues.

But despite all the negativity, Meta still has levers to pull. Its family of apps reaches 2.93 billion people on a daily basis and the company is just starting to monetize Whatsapp.

Let’s assume Meta can grow revenues just 5% a year for the next 10 years and get operating margins back up to 30%. Under that scenario, earnings in 10 years time would be roughly 57 billion. A 16 times multiple on those earnings leads to an enterprise value of 912 billion for an investment return of just under 15% per year.

However, Meta’s brand has significantly deteriorated in recent years and if more people move away from Meta’s family of apps, even low revenue growth is not guaranteed.

One thing’s for sure, Meta won’t throw in the towel without a fight and a lot of money spent. Lack of discipline in cost control is the key issue right now for investors.

Meta could still turn out to be a good investment but I’m personally not ready to buy it.

These are my own opinions, not financial advice. For more detailed analysis visit our website.