Image Shown: Shares of best idea Meta Platforms Inc surged higher by ~18% in afterhours trading on April 27 after its first quarter 2022 earnings report indicated that investor fears over its core business were overblown as its daily active user base posted solid growth in March 2022.
By Callum Turcan
The company behind Facebook, Instagram, and WhatsApp, Meta Platforms Inc (FB) reported first quarter 2022 earnings on April 27 that missed consensus top-line estimates but smashed past consensus bottom-line estimates. Shares of FB surged higher in the wake of its latest earnings report as the company’s family daily active people (‘DAP’) stood at 2.87 billion in March 2022, up 6% year-over-year, while its Facebook daily active users (‘DAU’) stood at 1.96 billion in March 2022, up 4% year-over-year. Rising competition from relative newcomers like TikTok in the social media space is not chipping away at Meta Platforms’ core business as investors had expected. The launch of Facebook Reels, which is similar to TikTok, has proven to be quite popular.
We include Meta Platforms as a top-weighted idea in the Best Ideas Newsletter portfolio and continue to be enormous fans of Meta Platforms. Shares of FB have tanked in recent months, though we have stuck with our thesis through thick and thin. Meta Platforms may finally regain its upward momentum in the wake of its stellar first quarter earnings update.
The selloff seen in shares of FB and US equity markets more broadly over the past several months is way overdone and driven more so by panic selling than anything else, in our view. Our fair value estimate, under what we deem reasonable valuation assumptions, stands at $367 per share of FB, which is well above where Meta Platforms’ stock is trading at as of this writing.
Image Shown: Meta Platforms’ family of social media apps continued to post nice daily active user base growth last quarter. Image Source: Meta Platforms – First Quarter of 2022 IR Earnings Presentation
Earnings Update
As Meta Platforms’ social media operations remained incredibly popular even in the face of major geopolitical turbulence, the company was able to grow its GAAP revenues 7% year-over-year last quarter. Surging operating expenses as Meta Platforms begins to set the stage for its broader “metaverse” strategy (a digital universe) saw its GAAP operating income decline 25% year-over-year last quarter, though its GAAP operating margin remained impressive at 30.5%. Meta Platforms’ headcount grew by 28% year-over-year last quarter.
Russia banned Meta Platforms’ Facebook and Instagram operations in March 2022 for what the Russian government deems to be “carrying out extremist activities,” which in reality means allowing users to share anti-war commentary. Meta Platforms has been banning Russian state TV outlets on its platforms in various countries, and we appreciate the company’s commitment to the Ukraine effort. The Russian invasion of Ukraine has negatively impacted digital advertising spend in the short term, though we expect that this space will recover going forward. We hope peace prevails soon in Ukraine.
The company’s GAAP diluted EPS stood at $2.72 in the first quarter, down 18% year-over-year though well ahead of consensus expectations. In its latest earnings press release, Meta Platforms noted that “in the first quarter of 2022, ad impressions delivered across our Family of Apps increased by 15% year-over-year and the average price per ad decreased by 8% year-over-year.” Additionally, Meta Platforms’ founder, CEO, and Chairman Mark Zuckerberg noted that “we made progress this quarter across a number of key company priorities, and we remain confident in the long-term opportunities and growth that our product roadmap will unlock” and that “more people use our services today than ever before, and I’m proud of how our products are serving people around the world.”
Its ‘Reality Labs’ business reporting segment houses its metaverse ambitions and revenues in this area grew 30% year-over-year last quarter. Though a small part of its business with sales of $0.7 billion last quarter–representing a little over 2% of its company-wide total of $27.9 billion–we appreciate that things are slowly moving in the right direction here.
Meta Platforms’ Reality Labs segment includes sales of software, hardware, and content in the virtual reality (‘VR’) and augment reality (‘AR’) space including revenues generated by its Oculus headsets and its Horizon Words (a virtual social space). The firm intends to take a 47.5% cut of virtual asset sales in Horizon Worlds (a 30% cut for sales made through Meta Quest Store and a 17.5% fee from Horizon Worlds). We caution that its Realty Labs segment posted a $3.0 billion segment-level operating loss last quarter, up sharpy year-over-year, as Meta Platforms continues to scale this part of its business.
These are still early days, but we are intrigued by the potential upside, which is entirely incremental to our fair value estimate for Meta Platforms. Here, we would like to stress that we like Meta Platforms’ capital appreciation upside potential due to its family of social media apps and related digital advertising revenues, with its metaverse ambitions offering additional upside to our fair value estimate.
Image Shown: Meta Platforms’ metaverse strategy is slowly moving in the right direction, witnessed through strong revenue growth at its Reality Labs business segment of late, though we caution that it will take some time before these efforts are profitable. Image Source: Meta Platforms – First Quarter of 2022 IR Earnings Presentation
Financial Firepower
Meta Platforms generated $8.6 billion in free cash flow last quarter (up from $7.9 billion in the same period last year) and spent $9.5 billion buying back its Class A common stock. In October 2021, Meta Platforms announced a $50.0 billion increase in its share buyback authority, and we view its share repurchases quite favorably given that its stock price is trading well below our estimate of its intrinsic value and has been for some time. At the end of March 2022, Meta Platforms had over $29.4 billion in share buyback authority remaining.
The company had $43.9 billion in cash, cash equivalents, and current marketable securities on hand at the end of March 2022 with no debt on the books. Please note this does not include $6.8 billion in noncurrent equity investments on hand at the end of this period. We are enormous fans of Meta Platforms’ fortress-like balance sheet as that provides the firm with the financial firepower to both repurchase “gobs” of its stock while continuing to invest heavily in its metaverse aspirations. Meta Platforms’ outstanding diluted share count fell by 5% year-over-year in the first quarter of 2022 due to its sizable repurchases.
Meta Platforms lowered its total expense guidance for 2022 down to $87-$92 billion versus $90-$95 billion previously and kept its capital expenditure guidance of $29-$34 billion unchanged during its latest earnings update (which represents a large increase from its $18.6 billion in capital expenditures in 2021). In the second quarter of 2022, Meta Platforms is guiding for $28-$30 billion in revenue which is broadly flat on a year-over-year basis, keeping in mind that its guidance for the current quarter includes an expected 3% headwind from foreign currency movements along with headwinds from the Ukraine-Russia crisis. Additionally, most of Meta Platforms’ investments are still going towards its family of social media apps.
Concluding Thoughts
We continue to be enormous fans of Meta Platforms and would like to stress that we at Valuentum stick with our theses. Shares of FB have sold off sharply in recent months, but we did not panic. The company’s core business remains strong, and its family of social media apps remain incredibly popular.
Shares of FB bounced higher in the wake of Meta Platforms’ first quarter 2022 earnings update as investors began to price in that ‘the sky is not falling,’ and that Meta Platforms remains a net-cash rich, free cash flow generating powerhouse with a bright longer term growth outlook. In March 2021, Meta Platforms laid out its ten-year vision for its metaverse ambitions, and things are beginning to take shape on this front.
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Callum Turcan owns shares of DIS, FB, GOOG, VRTX, and XLE and is long call options on DIS and FB. Apple Inc (AAPL), Cisco Systems Inc (CSCO) and Microsoft Corporation (MSFT) are all included in both Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Alphabet Inc (GOOG) Class C shares, Meta Platforms Inc (FB), Korn Ferry (KFY), PayPal Holdings Inc (PYPL) and Visa Inc (V) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Oracle Corporation (ORCL) and Qualcomm Inc (QCOM) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Meta Platforms, Oracle Corporation, and Taiwan Semiconductor Manufacturing Company Limited (TSM) are all included in Valuentum’s simulated ESG Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.