Meta Stock Price Gains on AI-Fuelled Earnings

• Fair
Value
Estimate:
$450
• Morningstar
Rating:
3
stars
• Morningstar
Economic
Moat
Rating:
Wide
• Morningstar
Uncertainty
Rating:
High

Meta
reiterated
that
it
believes
the
computing
capacity
it
is
building
can
be
used
for
various
tasks,
with
the
flexibility
to
shift
wherever
the
best
opportunities
emerge,
a
similar
view
that
Alphabet
has
shared.
We
aren’t
convinced
Meta
will
earn
strong
returns
on
its
infrastructure
investment,
but
we
expect
the
firm
will
continue
to
generate
strong
cash
flow
regardless
of
the
direction
AI
takes.
We
were
also
pleased
the
firm
maintained
its
expense
forecast
for
the
year.
We
are
increasing
our
fair
value
estimate
to
$450
from
$400.

Revenue
increased
22%
to
$39.1
billion
during
the
second
quarter,
beating
the
high
end
of
management’s
forecast.
User
growth
slowed
a
bit,
with
daily
family-of-apps
users
expanding
less
than
1%
sequentially
for
the
first
time
in
two
years,
reaching
3.27
billion.
Ad
impression
growth
slowed
sharply
to
10%
year
over
year
from
20%
last
quarter,
but
this
deceleration
primarily
reflects
a
surge
in
impressions
last
year
–
volume
growth
on
a
two-year
and
three-year
basis
has
held
fairly
steady
over
the
past
several
quarters.
Ad
pricing
was
impressive,
increasing
10%
year
over
year.
Meta
indicated
that
ad
demand
was
broad-based
across
geographies
and
industries,
but
again
pointed
to
strong
demand
among
retailers,
especially
those
based
in
Asia,
as
the
biggest
growth
driver.

Meta’s
Capital
Spending
Keeps
Rising

The
operating
margin
held
steady
with
the
prior
quarter
at
38%,
up
from
29%
a
year
ago,
thanks
to
lower
restructuring
costs
and
operating
leverage
against
R&D,
marketing,
and
overhead
costs.
While
capital
investment
increased
to
$8.2
billion
from
$6.1
billion
a
year
ago,
free
cash
flow
increased
nearly
20%
to
$13.2
billion
during
the
quarter.

CEO
Mark
Zuckerberg
continues
to
believe
that
Meta
has
massive
opportunities
around
AI
that
will
take
years
to
develop.
Meta
AI
and
the
ability
to
develop
customer
service
agents
for
businesses
remain
the
near-term
opportunities
the
firm
is
most
excited
about.
Meta
believes
Meta
AI
is
on
pace
to
be
the
most
used
AI
assistant
globally,
and
noted
that
the
service
has
gained
strong
adoption
in
India
alongside
WhatsApp.
The
integration
of
AI
into
Ray-Ban
glasses
has
also
exceeded
the
firm’s
expectations,
and
it
hasn’t
been
able
to
meet
demand.
These
opportunities
remain
very
small
relative
to
Meta’s
massive
advertising
business.
We
continue
to
expect
AI’s
biggest
impact
on
the
firm
will
come
from
improvements
the
technology
provides
to
the
user
experience
and
the
ability
of
advertisers
to
reach
targeted
audiences.

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