Meta Platforms META is set to release its second-quarter earnings report on Wednesday, July 30. Here’s Morningstar’s take on what to look for in Meta’s earnings and our outlook for the stock.

Key Morningstar Metrics for Meta Platforms

  • Fair Value Estimate: $770.00
  • Morningstar Rating: ★★★
  • Economic Moat: Wide
  • Morningstar Uncertainty Rating: High

Earnings release date

  • Wednesday, July 30, after the close of trading

What to watch for in Meta Platforms’ Q2 earnings

AI and advertising: We are looking for continued evidence of Meta’s artificial intelligence investments paying dividends in the firm’s core DigAds business, where it will drive most of its value/monetization for capex and opex.

  • In the past quarters, we have seen the firm’s ability to drive both time spent and monetization higher by leveraging its AI investments, and we expect a continuation of the trend. Within advertising, we are excited about the firm’s Advantage+ tool, which essentially automates ad-buying/targeting and provides high return on ad spend to advertisers while driving additional ad spending on Meta.
  • We think in a tight macro, advertisers are chasing measurable ROAS, and Advantage+ provides just that, leveraging the firm’s AI tools and its wealth of user data to precisely surface ads and drive conversions/returns.

Continued shift toward AI talent: Meta’s recent investments here have raised eyebrows, with the firm’s tens of millions luring talent from other AI labs. While investors may have questions, we’d caution against passing an early judgment. If the firm is set to spend potentially hundreds of billions of dollars on AI over the next decade or so, having the right talent to manage this spending and operationalizing it seems of crucial importance. That could explain the lack of adverse reaction to the firm’s stock despite the big spending as of late.

  • At the same time, investor tolerance of this spending is contingent on the core business (DigAds) remaining strong. If there is weakness, we think investors will send Zuckerberg a powerful reminder via their sell orders, like how they reacted when the company was investing in Reality Labs as Apple’s App-Tracking Transparency framework pummeled its core DigAds business in 2022.

Future of capex: We are keeping a keen eye on the firm’s capex plans for the year and are expecting them to inflect higher, especially when looking at the recent hiring spree in the AI space.

We think Meta is marginally undervalued, trading loosely 10% below our $770 fair value estimate. We remain optimistic about the firm’s continued ability to be the premier monetizer in social media, with average revenue per user miles ahead of its competition. We are also modeling continued monetization of Threads and WhatsApp via ads, as well as the eventual placement of ads on the Meta AI app. We believe this additional inventory should help revenue growth, especially as more mature platforms (Facebook, Instagram) get more saturated.

Fair Value estimate for Meta Platforms

With its 3-star rating, we believe Meta’s stock is marginally undervalued compared with our long-term fair value estimate of $770,implying a 2025 adjusted price/earnings multiple of 30 times and an enterprise value/adjusted EBITDA multiple of 16 times. We forecast Meta’s sales growing at a 12% compound annual growth rate for the next five years, spearheaded primarily by an increase in average revenue per user, with user growth also chipping in.

Drilling deeper, we believe Meta has a strong monetization opportunity ahead of it in Asia and the rest of the world. While we expect advertising sales from North America and Europe to grow steadily, we believe increasingly affluent and growing middle classes in Asia, Africa, and the Middle East will allow Meta to improve its ad monetization in those regions, lifting its overall top line.

Economic Moat Rating

We believe Meta merits a wide economic moat due to its intangible assets and the potent network effect around its Family of Apps business. While the firm’s Reality Labs segment continues to hemorrhage cash, we believe the FoA’s strong competitive advantages will allow the firm to generate returns in excess of its cost of capital over the next two decades.

Meta’s scale is also important when contextualizing the firm’s ongoing investments in AI. Meta’s capital expenditure, mostly on data centers equipped with expensive graphics processing units, has led investors to question whether the firm’s investments in AI will yield meaningful results and generate returns in excess of the firm’s cost of capital.

Financial strength

We view Meta’s financial position as rock-solid. The firm closed out fiscal 2024 with cash and cash equivalents of $78 billion, more than offsetting its debt balance of $29 billion. While the firm’s investments in AI stand to increase its capital expenditure considerably over the next few years, the advertising business remains a cash-generating machine, churning out tens of billions of dollars of free cash flow on an annual cadence.

Risk and Uncertainty

We assign Meta an Uncertainty Rating of High. We believe its investments in unprofitable ventures such as generative AI and Reality Labs add uncertainty to its business, even as its large and stable advertising business continues to generate substantial cash flows in our forecast.

As we look ahead, we believe Meta’s considerable scale and intangible assets, such as its ad-targeting algorithms, will likely enable the firm to maintain its dominance in the social media application space. While there are antitrust concerns around Meta’s business, with US regulators pursuing a monopoly case against the firm, we view an often-hypothesized breakup of Meta’s applications into separate businesses as unlikely. At the same time, there is headline risk that the firm faces as the case moves through the courts with a trial likely starting in 2025.

META bulls say

  • Meta’s core advertising business has benefited greatly through improved ad targeting and content recommendation algorithms as well as a secular increase in digital advertising spending.
  • Meta’s scale, with the majority of the world’s internet-connected users accessing its applications, allows it access to high-quality user data which it can package and sell to advertisers.
  • The firm has an opportunity to drive more ad inventory growth, leveraging new products such as Threads while improving its monetization of ads on more nascent features, such as Stories and Reels.

META bears say

  • Meta’s investments in Reality Labs and generative AI stand to lose the firm billions annually, taking some of the shine off its overall business.
  • The firm has a monopoly case against it in the US, which could potentially force it to break up, severing some of the scale advantages it has built.
  • Meta has disproportionately benefited from increased ad spending by Chinese retailers, including Temu and Shein. A slowdown in spending by these firms could hit Meta’s growth.

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