Meta Platforms Stock: Fantastic Results for a Fantastic Company (NASDAQ:META)

February 1 was a fantastic day for shareholders of Meta Platforms, the parent company of Facebook (NASDAQ: META). After the market closed, management released financial results covering the company’s final quarter of fiscal 2022. In addition to exceeding expectations on the high-end, and despite missing bottom line expectations, the company’s shares soared, soaring as much as 20% in after-hours trading. This came in response to multiple developments, including cost-cutting initiatives and a massive share buyback program. A few months ago, it would probably have been unthinkable for many investors that the stock could trade as high as it is today. But for those optimistic about the company, this is a well-deserved reward that was easy to see coming. In the future, I expect further benefits for the company. Although I also think the easy money has already been made. In response to these developments, I have yet to sell any of my shares in the company. After all, I’m still optimistic about it. But I could see myself starting to diminish my position to some extent, and as of the publication of this article, I was downgrading the company from a “Strong Buy” to a “Buy”.

A fantastic result

Over the past year, my portfolio has significantly outperformed the market in general. The positive experience was driven in part, but not entirely, by meta-platform performance. At the end of October last year, I started my initial position in the company and quickly increased my stake in the company. However, I regret not having bought many more. On October 31, I wrote an article explaining why I was rating the company as a “Strong Buy” after seeing the stock drop more than 70% at some point in 2022. Since then, my own position in the company generated a 55.5% profit before the after-hours push enjoyed by shareholders. At this point, I can say that my “strong buy” rating has gone well.

The fact that management has announced rather solid financial results reinforces the optimism that has already settled around the company. For the last quarter of 2022, revenue was $32.17 billion. Although that was 4.5% lower than the $33.67 billion the company generated a year earlier, it beat analysts’ expectations of about $475 million. Helping the business was an increase in the total number of users. Monthly active users, also known as MAUs, reached an all-time high for the company of 2.963 billion. That figure was up from 2.958 billion reported in the third quarter of last year and represented a 1.8% increase from the 2.912 billion reported for the last quarter of 2021.

Although the company continues to struggle in Europe, with total UAMs down by one million in a single quarter, it has seen attractive growth in developing economies. Another contributor to the outperformance, but still lower than a year earlier, was the ARPU generated by the company. In the United States and Canada, that figure was $58.77. A year earlier, it was $60.57. For context though, in the third quarter of the year it was $49.13. Such a seasonal surge is common for the company. A similar trend can be observed by looking at the other regions in which it operates. Overall, the ARPU of $10.86 is lower than the $11.57 reported a year earlier.

In the end, however, the company did not perform exceptionally well. But there is a good reason for this. According to management, earnings per share were $1.76. That’s down from the $3.67 reported a year earlier and below the $2.74 forecast by analysts. However, it is important to note that previously management had planned $2 billion in restructuring charges aimed at consolidating the footprint of its office facilities this year. This number has now been reduced to $1 billion due to the company’s decision to anticipate certain charges for the last quarter of 2022. Notably, the company reported just under $1.81 billion in charges for depreciation associated with leases and leasehold improvements. It also recorded $1.34 billion in abandonment charges for data center assets.

While the better-than-expected sales numbers likely helped push the stock higher, other developments likely had an even bigger impact. For example, management has announced that spending for next year is expected to be between $89 billion and $95 billion. That compares to what the company previously announced between $94 billion and $100 billion. Halfway through, that’s a $5 billion reduction, a good chunk of which could be attributed to the 11,000 employees the company has laid off. The company is also cutting its capital expenditure budget by between $30 billion and $33 billion. This compares to the range of $34 billion to $37 billion previously forecast. That’s another $4 billion in cash savings. Using all of that, combined with the company’s excess cash over debt of $30.82 billion, the company feels confident enough to launch a massive share buyback program. In the last quarter of 2022 as a whole, the company repurchased $6.91 billion worth of stock. For 2022 in its entirety, that figure was $27.93 billion. Under the initial share buyback program, the company has remaining capacity of $10.87 billion. However, the release of its results included the announcement of the launch of a $40 billion share buyback program.

Taking the cost savings and applying the appropriate tax rate, I then added these numbers to my previous estimates for operating cash flow and EBITDA for Meta Platforms for its fiscal year 2023. In total, I estimate the company should generate operating cash flow this year of $34.66 billion and EBITDA of approximately $34.49 billion. Although this is significantly lower than what was generated in 2022, it still implies that the company’s shares are trading at attractive levels. On a price/operating cash flow basis, the company’s forward multiple is 14. The company’s EV/EBITDA multiple, meanwhile, is expected to be 13.1. Using data from 2022, these multiples would be 10.8 and 10.9 respectively, while for 2021 they should be 8.5 and 8.2 respectively.

To take away

As I wrote in my initial bullish thesis on meta platforms, the company seems undervalued. That said, it’s nowhere near as cheap as it used to be. Ultimately, I think the company will either abandon their metaverse initiative, scale it down altogether, or achieve commercial success. In each of these scenarios, the underlying health of the business is robust and cash flow will increase significantly given that losses associated with its metaverse operations in 2022 totaled $13.72 billion. A return to the kind of performance achieved in 2021 or 2022 would indicate a lot more upside than where equities are today. Of course, timing is everything. The image is better if a return to normal occurs sooner. But there is no evidence that this will be the case. Due to this uncertainty and the rise in the company’s stock, I believe it is appropriate to have a more cautious “buy” rating on the company than the “strong buy” rating I had previously. As for my personal possessions, I don’t know exactly what I’m going to do. Given the rise in the stock, I will likely sell some of my stake in the company over time. After all, I manage a highly concentrated portfolio that captures only the most attractive prospects. And while Meta Platforms has an added benefit that would justify me keeping at least some of my assets in the company, it also makes sense to allocate capital elsewhere.