Slashing Meta’s Stock Fair Value Estimate to $260 From $346

Meta Platforms Stock at a Glance

• Current Morningstar Fair Value Estimate: $260
• Meta Stock Star Rating: 5 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Meta Platforms Earnings Update

Meta (META) reported mixed third-quarter results and its guidance for significant operating expense growth in 2023 was disappointing. We have also lowered our top line projections, which will likely further increase margin pressure next year. Our fair value estimate now stands at $260, down from $346. With uncertainty in the near term, we recommend patience with this wide-moat firm.

Our positive takeaways from Meta’s results were that the network effect remains intact given the firm’s encouraging user count and engagement metrics, which we think position Meta to accelerate revenue growth in late 2023, with the assumption that macro uncertainty eases. In addition, Reels is creating incremental engagement time per user and has also displayed early signs of high monetization potential. Plus, the firm continues to invest in enhancing its ad measurement capabilities while adding new advertising options for businesses, which we think will further drive a turnaround.

Our concern is mainly regarding the firm’s metaverse strategy, in which the firm plans to invest significantly more than we had projected in 2023, without much clarity about when any return on this investment could be realized. However, management does plan to pace metaverse investments at rates that accommodate overall bottom-line growth in 2024 and beyond.

Total revenue declined 4.5% year over year to $27.7 billion due to the stronger dollar (revenue would have been up 2% on a constant currency basis), economic uncertainty, and to a lesser extent, Apple’s data privacy policies. Advertising revenue came in at $27.2 billion, down 4% from last year (up 3% excluding the currency headwind).

Impressions sold increased 17% from last year due to user growth and engagement. However, ad prices declined 18% given higher sales of the lower-priced Reels ad inventory and lower demand from advertisers. Revenue per family monthly active user and Facebook monthly active user declined 8% and 6% from last year, respectively.