Meta Stock (NASDAQ:META)
According to my theory, Meta’s (NASDAQ:META) spending will become more effective in 2023. Although they are being more cautious than they were in 2022, this does not imply they will cease making investments in the metaverse.
Although Google (NASDAQ:GOOGL) has always generated more revenue than Meta, until 2022, Meta maintained exceptional operating margins. In previous years, despite having significantly lesser revenue than Google, Meta virtually had the same operating profits. This was due to the company’s excellent operating margins.
The fact that Meta’s average revenue per user (ARPU) has temporarily ceased to increase is one of the reasons they need to be more careful with their spending.
Not just Meta had a decline in ARPU in 2022. The ARPU for Snap (NASDAQ:SNAP) dropped from $13.64 in 2021 to $12.98 in 2022.
Because a large portion of Snap’s users is in the lucrative North American market, its ARPU is currently very disappointing.
The Year of Efficiency is the theme for 2023, CEO Mark Zuckerberg announced at the beginning of the 4Q22 call. With layoffs and reorganization, Meta ended in 2022. They are currently reducing middle management in order to simplify their organizational structure and reduce capex spending. In 3Q22 and 4Q22, expenses as a percentage of revenue went out of control, and management is aware that this is a problem.
Operating income decreased from $46.8 billion on $117.9 billion in revenue in 2021 to $28.9 billion on $116.6 billion in revenue in 2022, according to the 2022 10-K, and CEO Zuckerberg stated the following during the 4Q22 call: “I am also focused on delivering better financial results than what we have reported recently and on meeting the expectation that I outlined last year of delivering compounding earnings growth even while investing aggressively in future technology.”
In contrast to their previous projection of $94 to $100 billion, CFO Susan Li revealed during the 4Q22 call that they now anticipate 2023 spending to be in the range of $89 to $95 billion. She stated that compared to their previous projection of $34 to $37 billion, they now anticipate the 2023 capex to be between $30 and $33 billion.
The reduced 2023 expense forecast, according to CFO Li, was caused by slower hiring trends, and a lower cost of revenue principally because of adjustments in depreciation, and facility revisions. She emphasized how the new data center architecture is more adaptable and effective at handling workloads that are not AI-related.
In addition, the 4Q22 announcement reports the cancellation of numerous data center projects.
At the conclusion of the 4Q22 call, CEO Zuckerberg said a few things that really stood out to me: “I do want to continue to emphasize the dual goals here of making the company a better technology company and increasing our profitability.”
I am confident that Meta can achieve both of these objectives in the foreseeable future given everything they have accomplished thus far.
With their privacy adjustments in recent years, Apple (NASDAQ:AAPL) has made things difficult, but in the long run, digital advertising will continue to thrive.
Google, Meta, Amazon, and Snap earned $59 billion, $31.3 billion, $11.6 billion, and $1.3 billion in advertising income in 4Q22, respectively. One of the few businesses with a global size to profit fully from the further move to digital advertising is Meta.
When operating income declined for several consecutive quarters in 2022, shareholders experienced volatility. CEO Zuckerberg reiterated that Meta will resume publishing financial results that are stronger than those of late and that they intend to keep compounding earnings. If they don’t quickly surpass the operational income level for 2021, they won’t be able to compound earnings any longer. Therefore, I predict that operating income in 2023 will be higher than it was in 2022 ($28.9 billion), and more in line with the $46.8 billion level of 2021.
I estimate that Meta stock is worth 12 to 18 times its projected operating income for 2021, or $560 to $840 billion, rounded up to $5 billion.
In October 2022, there were 2,651,548,674 outstanding Meta shares as opposed to 2,848,292,671 in October 2020, and a fresh $40 billion buyback authorization was announced in the fourth quarter of that year. A total of 2,225,763,078 A shares and 366,876,470 B shares were outstanding as of January 27th, according to the 2022 10-K. A market cap of $482 billion is obtained by multiplying this by the share price of $186.06 as of February 6th. Since the market size is below my range for valuation, I believe long-term investors should buy Meta stock.
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