The meta drop gives a false picture of returns. We are increasing our price target

October 31, 2024 | angela

Don't let the after-hours market action fool you, Meta Platforms delivered a really strong third quarter and a current quarter revenue report that was above expectations. Revenue rose nearly 19% year-on-year to $40.59 billion in the three months ended Sept. 30, beating expectations of $40.29 billion, according to analyst estimates compiled by LSEG. Third-quarter earnings per share rose more than 37% to $6.03, beating LSEG's consensus EPS estimate of $4.25. META YTD Mountain Meta Platforms YTD shares of Meta fell 3% on the release and commentary, as investors sold fewer than expected daily active users in the quarter and raised full-year capex forecast. Bottom line: Yes, the closely watched Family Daily Active People (DAP) metric was down a bit in the third quarter, but still up nearly 5% year-over-year to 3.29 billion. The street was looking for 3.31 billion. No problem, that's still more than 40% of the world's population. The Family of Apps segment includes Facebook, Instagram, Threads, Messenger and WhatsApp. Oh, and in addition to this user base growth, average revenue per person (ARPP) across the app family rose more than 12% year over year to $12.29, a level slightly ahead of expectations. Management raised the low end of its full-year capital expenditure forecast by $1 billion. However, they also cut the top of their full-year total spending forecast by $1 billion. In 2025, more money will flow into artificial intelligence infrastructure – but with Meta already seeing a return on these investments so far, we think this is the right move and remain confident that management will move forward without those in recent years jeopardize the efficiency gains achieved. Ok, now that the “bad” is out of the way, let's look at what investors should really pay attention to when thinking about what to do with meta stocks. To this end, we are increasing our price target from $560 to $650 per share. That represents an increase of more than 9.5% over Wednesday's closing price, which was just a few dollars below the record closing price of $595.94 on October 4th. However, we maintain our rating of 2 on the stock and are looking for short-term gains-takers to give us a better opportunity to update the name. Meta Platforms Why We Own It: We value Meta Platforms for its targeted advertising dominance. Deep user engagement also creates a flywheel effect between users and content producers/marketplace sellers. The company's size provides the financial strength and talent of its employees to ensure new growth opportunities such as artificial intelligence, the metaverse, and virtual and augmented reality projects. We like management's strong focus on cost control. Competitors: Alphabet, TikTok (owned by China's ByteDance) and Snap Portfolio Weight: 4.53% Last Purchase: September 6, 2022 Initiated: May 29, 2014 Comment Let's now look at the positive third quarter results, including above-expected revenue and below-expected costs, significant operating margin expansion versus expected decline, and above-consensus operating income at Family of Apps and a narrower-than-expected loss at Reality Labs. While Reality Labs was moving in the right direction, it lost $4.4 billion in the third quarter. The unit, which houses Meta's virtual and augmented reality headsets and Metaverse efforts, has posted an operating loss of more than $58 billion since its founding in 2020. Quest headsets lead the segment, while Ray-Ban connected glasses have also been a big hit. CEO Mark Zuckerberg wowed developers at the Meta Connect 2024 event in late September with a demonstration of an AR glasses prototype called Orion. There were video testimonials from tech bigwigs, including Nvidia CEO Jensen Huang, who gave the device high marks. Operating cash flow was nearly $2.5 billion above what the Street expected, and capital spending was over $1.8 billion below expectations. This resulted in free cash flow above estimates of $3.5 billion. It's worth noting that there was a timing advantage here, so some capital expenditure was deferred into the fourth quarter, which boosted free cash flow – nonetheless, operating cash flow was absolutely impressive. In addition to the strong third quarter results, management's revenue guidance for the current (fourth) quarter was above expectations at the midpoint. In terms of shareholder returns, the company repurchased $8.86 billion worth of shares and paid out an additional $1.26 billion in dividends. In the post-earnings call, Zuckerberg highlighted WhatsApp's strong growth, noting that the U.S. is one of the platform's fastest-growing countries, having just surpassed 2 billion calls per day. As for Threads, Meta's answer to X, formerly Twitter, the platform sees over 1 million new signups daily with nearly 275 million monthly active users. Zuckerberg also said, “We are also making great strides in our AI efforts and see AI having a positive impact on almost all aspects of our work, from our core business engagement and monetization to our long-term roadmaps for new services and computing platforms . In particular, Meta AI, the enterprise version of a ChatGPT-type artificial intelligence generative search/response engine, now has over 500 million monthly active users. Regarding Meta's work on the large Llama language model that underlies Meta AI, Zuckerberg said, “As Llama becomes more widely adopted and becomes the industry standard, the improvements in its quality and efficiency will impact all of our products,” adding, that the team is “working with enterprises to make it easier to use, and now we are also working with the public sector to roll out Llama across the U.S. government.” He also added that the Llama 4 model “is now widely used in development”. Regarding social media platforms, Zuckerberg said: “Improvements to our AI-driven feed and video recommendations have resulted in an 8% increase in time spent on Facebook and a 6% increase in time spent on Instagram. This year alone, more than a million advertisers used our Gen AI tools to create more than 15 million ads last month, and we estimate that companies using image generation are seeing a 7% increase in conversions, and “We think there's a lot more potential here.” Looking at global advertising data, ad impressions measure how many times an ad is shown in an app. They increased by 7% year-on-year, while the average price per ad increased by 11% year-on-year. Forecast Looking further into the forecast, Meta expects fourth-quarter 2024 revenue to be in the range of $45 billion to $48 billion, which LSEG said would come in at $46.5 billion, above the Street's target of $46 billion .31 billion US dollars. However, management also raised its full-year capital expenditure forecast and now expects a decline in the range of $38 billion to $40 billion. This increase was on the lower end compared to the previous range of $37 billion to $40 billion. The $39 billion median is slightly higher than the Street's $38.25 billion estimate. Looking ahead to 2025, the team noted in the press release: “We continue to expect significant capital spending growth in 2025. Given this and the back-end weighting of our capital spending in 2024, we expect infrastructure spending growth to accelerate significantly .” next year, as we will see higher growth in depreciation and operating costs of our expanded infrastructure fleet.” That comment could be responsible for the stock's decline – aside from profit-taking given the stock's nearly 70% gain year-to-date. However, before the release, the Street was already expecting capital spending to rise by around 24% in 2025. So that's not a big surprise, and we think the sellers are wrong and long-term investors will be rewarded for their patience. Zuckerberg said on the call: “It's that time of year at Meta when we're planning our budget for next year, and that's still a work in progress, but I wanted to share a few things that stood out to me as much as we did. “First, it is clear that there are many new opportunities to leverage new AI advances to accelerate our core business, which should deliver strong ROI over the next few years. And secondly, our AI investments continue to require serious infrastructure, and I expect we will continue to invest significantly. We haven't decided on a final budget yet, but these are some of the directional trends I'm seeing. Note that this bodes well for the Nvidia club name as we consider releasing quarterly results later in the season. Despite the increased capital spending forecast, the team lowered the high end of its full-year total spending forecast and is now targeting a range of $96 billion to $98 billion, down from $96 billion to $99 billion previously. That's slightly below the consensus estimate of $97.22 billion at the midpoint. (Jim Cramer's Charitable Trust is Long META, NVDA. See a full list of stocks here.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable foundation's portfolio. If Jim discussed a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION SET FORTH ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. THERE ARE NO fiduciary duty or duty IN RECEIVING YOUR INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.

At the Meta Connect developer conference, Mark Zuckerberg, head of the Facebook group Meta, shows the prototype of computer glasses that can display digital objects in transparent lenses.

Andrei Sokolov | Picture Alliance | Getty Images

Don't be fooled by what's happening on the stock market outside of business hours, Metaplatforms delivered a really strong third quarter and current quarter revenue guidance that was above expectations.

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