My thoughts on META

I'd like to start a dialogue on what investors think about META – please challenge or add onto this discussion. This is a long post, so I've posted the TLDR below.

Given the recent negative non-farm jobs report and unemployment prints, I think the market is missing a great opportunity in META stock after a great earnings report.

Context: META pre-earnings was about $470 and post earnings is now $488. They beat earnings by 8%. META is down from its high of $540.

Position: I have sold some META puts at lower strike points, so yes I am biased and want the company to perform well, but will change my mind if there's a compelling argument otherwise.

First thoughts on the market:

The sell-off is a correction that gives long term investors an opportunity to buy companies at a less inflated P/E ratio. I think recession concerns are overblown given the following:

• Absolute levels of unemployment remain very low
• Meeting inflation targets are important for encouraging discretionary spending for lower income populations so that buying power won't be continuously eroded and we can move past this tightening cycle
• The Fed has the ability to reduce interest rates significantly if warranted
• Reduction in mortgage rates will allow: (1) existing homeowners to reduce interest burden and increase discretionary spending and (2) stimulate big ticket purchases (e.g. cars, homes, etc.)
• Reduced bond yields means equities become more attractive in comparison. In the short run, the carry trade has largely unwinded from its highs in July 2024 and further downside risk is less than before – see chart here from ING.

META specific thoughts:

• Earnings:
  • Just crushed earnings expectations, their advertising business continues to run strong with user base growth. They stated that they have seen early benefits from their CAPEX spend on AI (not sure if it reaches desired ROI yet however).
• Reasonable valuation in the short run:
  • Currently trading at ~25 PE (TTM) and forward PE is ~21 to 24 depending on EPS forecasts. Source linked here. For context, Meta hit its lowest PE of 14 in December 2022 when people thought Meta wouldn't exist anymore due to ad spend concerns, apple privacy updates, and issues with facebook engagement.
  • Compared to other tech companies investing in AI, Meta (along with Google) has one of the lowest P/Es with a comparable growth rate. Relative to its peers, its PEG ratio is lower as well. However, I think some of this difference is explained by its reliance on ad spend which is cyclical and less resilient in downturns.
• Long term bets:
  • Meta has invested in long term bets in AI and Virtual reality which have yet to pay off and are considered a cost burden.
  • For example, in their recent earnings call, they've talked about using AI stand-in personas to help influencers and small businesses answer questions to followers. If they become the “small business or personal” AI, then they can deepen relationships with users and monetize in ways beyond ads through reoccuring services revenue. Reoccuring revenue and proving monetization of AI will give it a boost in EPS given investors value this type of revenue more.
  • I believe Meta is trying to move away from reliance on ads and provide value to users in ways that cannot be pulled away as easily (similar to other SaaS companies)
• Spending Risks:
  • CAPEX is large which has a future drag on EPS, but I think they can scrap their VR initiatives if needed if cost efficiency is required.
  • If AI doesn't work out, EPS growth will be harmed in the outer years (assuming near term growth is not expected to be fueled by AI).
• Economic Risks:
  • Short term dependence on ad spend which is cylical and impacted during recessions
  • Chinese companies spending a lot on Meta for ads – this might go away
  • I think given interest rates are coming down – hopefully any softness will be alleviated quickly.

TLDR: Short term business is reasonably valued and forward valuations aren't priced for explosive AI monetization. This results in upside both from an EPS and P/E perspective if there is no prolonged economic downturn and especially if new AI products show early chutes of monetization. Would appreciate any thoughts/challenges to this from other investors.