Meta Delivered Explosive Growth in Q1

META reported a revenue of $42.3 billion and EPS of $6.43 in Q1, representing a 16% and 37% growth respectively. Daily active users grew another 6% to 3.43 billion, this is mind boggling growth on top of a 3 billion user base.

Total expense only grew 9% YoY, much slower than the revenue growth rate, resulting in a 3% margin expansion. Meta stock is currently trading at a 25 PE ratio which is not expensive for a company growing 16% per year.

The CEO mentioned 5 major opportunities the company is currently investing in: improved advertising, more engaging experiences, business messaging, Meta AI, and AI devices. I believe the first 2 are the most important as they drive the majority of the revenue. The result seems great for the past quarter, as Meta sees average price per ad grew by 10%, conversion rates grew by 5%, and time spent on Facebook, Instagram and Threads are all growing nicely (7%, 6% and 35%). Meta’s business messaging revenue is growing fast, delivering $510 million in revenue, a 34% YoY growth (This data can be found under Family of apps “other” revenue) .This is a way for Meta to monetize WhatsApp and Messenger, where it allows 3rd party businesses and their customers to message each other directly.

This allows third party businesses to do various things on the messaging apps, such as selling products, providing customer support, etc. So far business messaging is only feasible in developing countries where there is a lower cost of labor. However as the AI agent becomes more powerful, more businesses in developed countries will be able to afford communicating with customers directly with the help of AI. I think this could be a potential growth driver for Meta considering the enormous user base of WhatsApp and Messenger.

Meta AI is also making some good progress, which has almost a billion monthly active users. However its performance seems to be subpar compared to ChatGPT based on online reviews and my personal experience. Meta is still trying to improve and scale this product and is not expecting it to become profitable soon.

Turning to AI devices, Meta’s smart glasses product line is seeing some initial success, however it is not successful enough to help the Reality Labs division to turn a profit. I’m a fan of VR and AR products so I personally don’t mind the company burning some cash on this category, and it seems the loss has been stabilized at around $4 billion per quarter in the past few years, which is good to see.

With the latest data, the estimated intrinsic value of Meta stock is $662 using a DCF model, indicating a 10.8% CAGR in the next 5 years. I used a conservative FCF growth rate due to the trade uncertainties and uncertain ROIC of the huge capex spending:

Latest TTM FCF $52.3 Billion
FCF growth rate of 13% (5YR AVG 17.67%)
Share repurchase of 2% per year (5YR AVG 2%)
Future Price/FCF ratio of 25 (5YR AVG 25.6)
Discount rate of 10%

Based on the above calculation, Meta stock looks fairly valued and I plan to continue holding the stock. I think it is reasonable to expect at least 1 or 2 out of the 5 major investments to pay off which could potentially drive more growth and propel the stock price higher than expected.

Holdings Disclosure

SoloFIRE META ownership: 18% of portfolio
SoloFIRE META Average Cost Paid: $190
META price as of writing: $639
Holding time: 4 years

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DISCLAIMER: SoloFIRE is not a registered financial advisor. This post contains author's personal opinion only and it should NOT be considered financial advice.