Meta stock price (NASDAQ:META) has skyrocketed. This is a continuation of the company’s share price recovery from lows of just over $90 per share. The company is still about 40% below its all-time highs, which is extremely astounding. As we’ll explain throughout this piece, Meta stock is overpriced and has a poor track record of driving shareholder returns.
Financial Performance of Meta Platforms
With a 3% YoY revenue growth rate, the company achieved a respectable financial performance for the quarter.
However, this is insufficient to keep pace with inflationary growth. It also represents a significant decrease in the company’s previous YoY growth rate. Europe’s revenue declined year on year and has remained sluggish, indicating that the company’s penetration and revenue from this area have peaked. We anticipate that revenue will remain fluctuating but low in this region.
The corporation managed to expand sales in the United States and Canada; but, revenue growth appears to have slowed in other areas, particularly in major growth markets. The company’s revenue in Asia-Pacific climbed by 3-4%, while revenue in the rest of the world increased by 9%. This predicts that the Rest of the World will continue to grow, but Asia Pacific will contract.
However, there is an advantage to the company’s revenue remaining relatively strong.
Expenses for Meta Platforms
The costs of Meta Platforms have remained high. The company’s 1Q 23 revenue increased by 75% compared to a more usual 1Q 21 level of 57%, which would have been significantly lower without Reality Labs.
The cost of revenue and marketing and sales expenses for the organization has stayed relatively consistent. The company’s G&A spending is also greater than they were two years ago but remains relatively consistent. R&D revenue has increased the company’s costs. This has increased from 20% to 33% of the company’s revenue and shows no indications of decreasing.
In our opinion, the company’s genuine R&D-oriented revenue, excluding Reality Labs, might be considerably closer to 15%.
Active Users on Meta Platforms
Although the last quarter of the year is typically the company’s strongest, active users have continued to rise.
Across its properties, the company had 3.81 billion monthly active users. Daily active users remained high across the portfolio as well, helping the company to flourish in both categories. The company’s ARPP (average revenue per person) fell somewhat, owing in part to a mixed diversification of consumers as the number of users in Europe declined.
There is one point to be concerned about here. Previously, the company benefited from lower fixed costs, increased user count, and higher revenue per user as a triple whammy to increase profits. With the loss of margin increases and greater revenue per user, the company’s potential to continue improving sales is significantly reduced.
Our Opinion on Meta Stock
What ultimately matters for Meta Platforms investors is whether they can generate profits.
The company’s revenue increased year on year, however, its operating profitability declined marginally. Reality Labs’ impact declined QoQ but increased significantly YoY, resulting in a little over $7 billion in operational profitability. At the end of the day, the company earned slightly less than $6 billion in net income, giving it a P/E ratio in the mid-20s.
Reality Labs has yet to generate long-term earnings for the corporation. Reality Labs’ sales in the quarter were $339 million, a 50% decrease year on year. Apple is expected to enter the market. This could continue to put pressure on the company’s earnings in the future. Despite the $16 billion yearly earnings hit, we don’t see any realistic way for Reality Labs to pay off at this time.
With his substantial financial stake in Meta Platforms, Mark Zuckerberg is not interested in abandoning Reality Labs. More importantly, Meta Platforms’ anti-trust pressure makes it much more difficult for the company to grow its business from something it did not create from scratch.
Thesis Peril
The most significant danger to our thesis is a total overhaul of the company’s ambitions and a new focus on a project with a considerably higher possibility of growing long-term earnings. The fundamental business of the corporation is a big profit generator that generates billions of FCF. The corporation has the ability to aggressively repurchase shares and drive returns. However, if it does not, we expect it to continue to suffer.
Conclusion
It’s difficult to advise against investing in Meta stock. The company has a very strong core business that can create significant revenues. As a result, the company has a history of generating cash flow and has set itself up to generate significant shareholder returns. Instead, it has decided to spend all of its cash flow on a fantasy.
Reality Labs costs the firm $16 billion per year. The division’s revenue has decreased significantly year on year. Because of Mark Zuckerberg’s influence over the corporation, investors cannot halt their investments in Reality Labs. Until that changes, we believe the company’s valuation has ballooned, making it a bad investment.
The corporation currently has no other options for investing and dealing with antitrust, raising the chance that its investments may be wasted.
Featured Image: Unsplash @ dlxmedia.hu
