Meta Platforms, Promising Long-Term Investment Amidst Robust Revenue Growth

Time to Ride the Momentum: Is It The Right Time to Invest in Meta Platforms?

Meta Platforms Inc., formerly Facebook, has carved out a significant niche. With a market value of $671.5 billion, Meta's influence is far-reaching. Despite encountering headwinds in the form of privacy concerns, disappointing returns from augmented reality, and increased competition from the likes of Snap and TikTok, the internet behemoth is poised to stage a remarkable turnaround. As a testament to its strong fundamentals, Meta's shares have approximately doubled since the start of the year, placing it among the top momentum stocks in the S&P 500.

Robust Q1 Earnings Defying Adverse Conditions

Meta's performance during Q1 signaled a shift in the tides. Despite a challenging ad environment that put pressure on other digital media players, Meta's Q1 earnings showcased better-than-expected sales. This suggests Meta is bucking the trend and leveraging its core strengths to stay ahead. While the bottom line did not make for a good year-over-year comparison due to a slump in ad spending, Meta's solid status as a titan in social media and communication services cannot be undermined.

Meta's gross profit for the quarter ending March 31, 2023, saw a year-over-year increase of 2.89% to $22.537B. Though it saw a 4.32% decline in the gross profit for the twelve months ending March 31, 2023, Meta's long-term gross profit trend shows signs of resilience and adaptability.

Riding the Wave of Revenue Growth

Meta has been maintaining a steady pace in sales over the past year. Despite the adverse conditions of the pandemic and job cuts, Meta has shown promising signs of traction. Revenue is expected to slip 1% to $27.6 billion in Q1, however, analysts predict a sales growth of 5% for the full year and an impressive 11% in 2024. These projections indicate that Meta's cost-cutting measures, coupled with revenue gains, are likely to drive strong earnings growth in the future.

Positive Signs for Future Revenue Growth

Meta's bull case largely depends on a return to robust revenue growth. There have been positive signs pointing to this direction. For example, in the Piper Sandler's biannual teen survey published in April, Instagram's popularity increased by 3 points while TikTok's dominance decreased slightly. This shift in user preference suggests that Meta's product improvements are resonating with users, potentially leading to increased engagement in the future.

Furthermore, Jefferies analyst Brent Thill noted an expected acceleration of Meta's revenue growth in the second half of 2023. This optimism is based on higher engagement due to AI efforts, more upside from the "underappreciated" click-to-messaging business, and easy year-over-year comparisons.

An Upward Momentum Amid Cost Cuts and Free Cash Flows

While cost cuts have been a critical part of Meta's strategy, the company's free cash flows are also showing signs of improvement. As of Q4 2022, Meta delivered free cash flows of $5.3B. If we remove the restructuring charges of approximately $4.2B, the figure would have been approximately $9.5B. With Meta reducing its spending and improving monetization across its Family-of-Apps, free cash flow generation is likely to improve further.

This upward trajectory in free cash flows could lead to an increase in stock buybacks, especially considering Meta's net cash balance of $30B, which nearly negates any liquidity or bankruptcy risk. In Q4'22, Meta's management announced an addition of $40B to their remaining buyback authorization of $10.87B. Such a robust capital return program, combined with a modest ~5% CAGR sales growth, will be enough for Meta to deliver substantial alpha to investors over the next decade.

A Promising Long-Term Investment

Despite the recent increase in Meta's stock price, it still offers solid risk/reward for long-term investors. Assuming a base case P/FCF exit multiple of ~15x, Meta's stock could potentially trade at around $430 per share by the end of 2027, implying a ~16% CAGR return over the next five years.

Looking Ahead

Meta's stock has shown signs of stabilization and recovery. Following its Q4 results, Meta's stock experienced a more than 25% increase in a single session. The stock has now consolidated in the $170-$180 range, showing signs of moving back above the $200 level. The stock's momentum factor grade has improved from "C-" to "A+", suggesting a significant turnaround. With Meta still trading 46% below its all-time highs, there is plenty of room for growth.

In conclusion, given Meta's strong fundamentals, promising signs of future growth, and the potential for significant returns, it appears to be a good time to invest in Meta for the long-term. As always, investors should carefully consider their financial goals and risk tolerance before making investment decisions.