Meta's stock drop tells the wrong story on earnings — so, we're boosting our price target

Don't let the after-hours stock action fool you, Meta Platforms delivered one heck of a strong third quarter and a current quarter revenue guide above expectations. Revenue in the three months ended Sept. 30 rose nearly 19% year over year to $40.59 billion, outpacing the $40.29 billion expected, according to analysts' estimates compiled by LSEG. Earnings per share in the third quarter jumped more than 37% to $6.03, exceeding the LSEG's consensus EPS estimate of $4.25. META YTD mountain Meta Platforms YTD Shares of Meta dropped 3% on the release and commentary, with investors selling on fewer-than-expected daily active users in the quarter and bump higher in full-year capital expenditures guidance. Bottom line Yes, the closely watched Family Daily Active People (DAP) metric in Q3 came up a bit short, but it was still up nearly 5% year over year to 3.29 billion. The Street was looking for 3.31 billion. No biggie, that's still more than 40% of the global population. The Family of Apps segment includes Facebook, Instagram, Threads, Messenger, and WhatsApp. Oh, and in addition to that user-base growth, the average revenue per person (ARPP) across the family of apps increased more than 12% year over year to $12.29, a level slightly above expectations. Management did raise the lower end of their full-year capital expenditures guide by $1 billion. However, they also cut the top end of their full-year total expense guidance by $1 billion. Money going toward artificial intelligence infrastructure will increase in 2025 — but given that Meta is already realizing a return on those investments thus far, we think it's the right move and remain confident that management will proceed without risking the efficiency gains made in recent years. Ok, now that the "bad" is out of the way, let's look at what investors should really be focused on as they consider what to do with Meta stock. To that end, we're increasing our price target to $650 per share from $560. That implies more than 9.5% upside from Wednesday's close, which was just a few dollars below its record-high close of $595.94 on Oct. 4. We are, however, keeping our 2 rating on the stock, looking for short-term minded profit-takers to give us a better opportunity to upgrade the name. Meta Platforms Why we own it : We value Meta Platforms for its targeted advertising dominance. Deep user engagement also creates a flywheel effect between users and content producers/marketplace sellers. The company's scale provides the financial power and employee talent needed to ensure new growth avenues such as artificial intelligence, the metaverse, and virtual and augmented reality projects. We like management's intense focus on cost controls. Competitors : Alphabet , TikTok (owned by China's ByteDance) and Snap Weight in portfolio : 4.53% Most recent buy : Sept. 6, 2022 Initiated : May 29, 2014 Commentary Now let's dig in on the third quarter positives including revenue above expectations, costs below expectations, significant operating margin expansion against an expected contraction, as well as above consensus operating profit in Family of Apps and a smaller than expected loss in Reality Labs. While moving in the right direction, Reality Labs lost $4.4 billion in the third quarter. The unit, which houses Meta's virtual and augmented reality headsets and its metaverse efforts, has recorded an operating loss of more than $58 billion since its inception in 2020. Quest headsets lead the segment, while connected Ray-Ban glasses have also been a big hit. CEO Mark Zuckerberg wowed developers at the Meta Connect 2024 event in late September with a demonstration of an AR glasses prototype called Orion. There were video testimonials for tech bigwigs, including Nvidia CEO Jensen Huang, who gave the device high marks. Operating cash flow was nearly $2.5 billion above what the Street was looking for, and capital expenditures were over $1.8 billion less than expected. That resulted in $3.5 billion of free cash flow more than estimates. It should be noted that there was a timing benefit here so some capital expenditures got pushed into the fourth quarter boosting the free cash flow – nonetheless, operating cash flow was outright impressive. Compounding the strong Q3 results, management's revenue guide for the current (fourth) quarter was ahead of expectations, at the midpoint. As for shareholder returns, the company repurchased $8.86 billion worth of stock and paid out an additional $1.26 billion in dividends. On the post-earnings call, Zuckerberg called out strong growth of WhatsApp, noting the U.S. is one of the platform's fastest-growing countries and that it just surpassed the 2 billion calls per day milestone. As for Threads, which is Meta's answer to X, formerly Twitter, the platform is seeing over 1 million new sign ups per day with nearly 275 million monthly active users. Zuckerberg also said, "We're making a lot of progress with our AI efforts, too, and we're seeing AI have a positive impact on nearly all aspects of our work, from our core business engagement and monetization to our long-term road maps for new services and computing platforms." Notably, Meta AI, the company's version of a ChatGPT-type generative artificial intelligence search/answer engine, now has over 500 million monthly active users. Regarding Meta's work on the large language model Llama, which underlies Meta AI, Zuckerberg said, "The more widely that Llama gets adopted and becomes the industry standard, the more that the improvements to its quality and efficiency will flow back to all of our products," adding that the team is "working with enterprises to make it easier to use, and now we're also working with the public sector to adopt Llama across the U.S. government." He also added that the Llama 4 model is "now well into its development." Regarding social media platforms, Zuckerberg said, "Improvements to our AI-driven feed and video recommendations have led to an 8% increase in time spent on Facebook and a 6% increase on Instagram. This year alone, more than a million advertisers used our Gen AI tools to create more than 15 million ads in the last month, and we estimate that businesses using image generation are seeing a 7% increase in conversions and we believe that there's a lot more upside here." Looking at worldwide advertising data, ad impressions, measure how many times an advertisement is shown on an app, increased 7% year over year, while the average price per ad increased 11% year over year. Guidance Taking a closer look at guidance, Meta expects fourth-quarter 2024 revenue to be in the range of $45 billion to $48 billion, which at the $46.5 billion midpoint, comes in ahead of the $46.31 billion the Street was looking for, according to LSEG. That said, management did also bump up its capital expenditures guidance for the full year, now expecting it fall in a range of $38 billion to $40 billion. That raise was at the low end versus the prior range of $37 billion to $40 billion. The $39 billion midpoint is a bit higher than the $38.25 billion the Street was expecting. Looking ahead to 2025, the team noted on the release, "We continue to expect significant capital expenditures growth in 2025. Given this, along with the back-end weighted nature of our 2024 capital expenditures, we expect a significant acceleration in infrastructure expense growth next year as we recognize higher growth in depreciation and operating expenses of our expanded infrastructure fleet." This commentary may be to blame for the stock getting hit — aside from profit taking given the stock's nearly 70% year-to-date gain. That said, the Street was already modeling in a roughly 24% increase in capex for 2025 prior to the release, so it's not a huge surprise and we think the sellers are misguided and long-term investors will be rewarded for their patience. Zuckerberg said on the call, "It's the time of the year at Meta, when we plan our budget for the next year, and that's still in progress, but I wanted to share a few things that have stood out to me as we've gone through this process so far. First, it's clear that there are a lot of new opportunities to use new AI advances to accelerate our core business that should have strong ROI over the next few years. So, I think we should invest more there. And second, our AI investments continue to require serious infrastructure, and I expect to continue investing significantly there too. We haven't decided on a final budget yet, but those are some of the directional trends. that I'm seeing." Note, this bodes well for Club name Nvidia as we think about its quarterly earnings release later in the season. Despite the increased capital expenditure forecast, the team lowered the upper end of its full year total expenses guidance, now targeting a range of $96 billion to $98 billion, down from $96 billion to $99 billion previously. That's a bit below the $97.22 billion consensus estimate, at the midpoint. (Jim Cramer's Charitable Trust is long META, NVDA. See here for a full list of the stocks.) 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Don't let the after-hours stock action fool you, Meta Platforms delivered one heck of a strong third quarter and a current quarter revenue guide above expectations.