Meta Platforms (NASDAQ:META) has become my largest holding, as I recently took action to bolster my existing position following its post-earnings plunge.
The stark contrast between its stellar Q1 results and the nosedive in the share price solidified my conviction in having Meta be my primary investment. I am bullish on the stock due to its stunning revenue growth, ongoing margin expansion, and AI investments that directly benefit Meta’s results.
Why Did Meta Platforms Stock Plunge On Q1 Results?
Before we examine Meta’s Q1 numbers, let’s first examine why the stock started to plunge when its report was released. Well, it appears that Meta’s commitment to AI investments spooked Wall Street.
During the earnings call, Susan Li, Meta’s CFO, explained that the company now expects total expenses to be between $96 billion and $99 billion, up from the prior outlook of $94 billion to $99 billion. This change reflects higher infrastructure investment costs, mirrored in Meta’s growing CAPEX outlook.
Specifically, Meta expects its annual CAPEX to be between $35 billion and $40 billion this year, up from $30 billion to $37 billion. This increased spending can be attributed to Meta accelerating its infrastructure investments to support its AI roadmap.
Increased investment in AI was met with skepticism because it’s challenging for analysts and investors to accurately measure the return on capital. The landscape is still foggy, given that we’re at the inception of this new era. AI’s commercial potential and its direct impact on revenue generation are yet
to be fully understood—a concept not exclusive to Meta.
Yet, the market appears to overlook Meta’s unique position, wherein AI investments directly fuel revenue growth, which is evident from the noteworthy growth in user engagement. At the same time, Meta’s revenue and net income are experiencing remarkable growth rates, rendering the increase in CAPEX rather affordable.
AI Investments, User Growth Fuel Superb Revenue, Earnings Growth
Meta’s ongoing investments in AI have already started to contribute to its results by fueling heightened engagement and boosting ad impressions. Going back to Meta’s earnings call, Mark Zuckerberg revealed that AI-driven recommendation systems had a notable impact on growing user engagement in Q1,
with about 30% of Facebook feed posts and over 50% of Instagram content being AI-recommended.
Moreover, ad impressions grew by 20% in Q1, accompanied by a 6% rise in the average ad pricing. Combine that with Meta’s daily active people (DAP) growing by 7% to 3.24 billion during the quarter, and you get how revenues surged by an impressive 27% compared to last year.
In fact, Meta’s growing CAPEX should be of no concern, as the company’s skyrocketing profits make these investments easily affordable.
Meta has maintained a prudent cost control culture, which led to expenses growing by only 6% in Q1. With revenue growth considerably outpacing the rise in costs, Meta’s operating margin jumped from 25% to 38%. In turn, net income skyrocketed by 117%.
The company is generating so much cash flow from operations that, despite expecting to allocate up to $37 billion in CAPEX this year, Wall Street estimates that free cash flow will hit a record $45.3 billion this year! Thus, the post-earnings plunge on high CAPEX guidance is an overreaction by the market. Not only does the company remain wildly profitable, but we know for sure that its investments has contributed to its underlying revenues and earnings growth.
Is META Stock a Buy, According to Analysts?
Turning to Wall Street, Meta Platforms has a Strong Buy consensus rating based on 39 Buys, three Holds, and one Sell assigned in the past three months. At $530.93, the average META stock forecast implies 23.5% upside potential.
If you’re unsure which analyst you should follow to buy and sell META stock, the most profitable analyst covering the stock (on a one-year timeframe) is Brad Erickson, with an average return of 66.1% per rating and a 74% success rate. Click on the image below to learn more.
Takeaway
In summary, Meta Platforms’ post-earnings plunge prompts a closer examination of market sentiment versus fundamental performance. Despite Wall Street’s initial reaction regarding Meta’s costs and CAPEX outlook, the company’s Q1 results displayed exceptional revenue and earnings growth. With AI investments contributing to growth and margins on the rise, Meta’s net income and free cash flow prospects remain fantastic.
With these developments widely contrasting with a rather irrational market reaction, I feel very confident in having Meta be, by far, my largest position moving forward.
