Raising fair value for Meta Stock on AI and Ad leadership
Facebook and Instagram owner is the clear leader in social media, with prowess in digital advertising. Mentioned: Meta Platforms Inc (META)
Overview
We are raising our fair value estimate for wide-moat Meta META to $560 from $450 after taking a fresh look at the firm’s overall business and incorporating a more optimistic outlook on the firm’s investments in artificial intelligence, especially as they relate to Meta’s ability to improve its ad-targeting business. While the firm’s investments in AI could potentially improve its core business, we remain pessimistic on the long-term value created by Meta’s investments in its Reality Labs division and are reducing our Morningstar Capital Allocation Rating to Standard from Exemplary.
Market Leadership
We view Meta as the clear leader in social media. The firm’s application lineup, which includes Facebook, Instagram, WhatsApp, and Messenger, has close to 4 billion monthly active users, giving Meta unmatched scale in the space.
Business Strategy
The firm’s strategy is two-pronged. On the user side, Meta has leveraged its scale and social media savvy to improve its product lineup, adding features such as Stories, Reels, and even new products such as Threads. Such enhancements and additions not only improve user engagement, but also allow Meta to grow revenue by layering ads onto them.
Ad Business
On the ad side, Meta allows advertisers of all shapes and sizes to place ads in front of engaged users. The company has benefited greatly from a general shift toward digital advertising within the broader advertising market, with social media advertising gaining substantial share, especially since the covid-19 pandemic. To bolster its ad business, Meta has invested heavily in improving its ad-targeting algorithms, allowing it to improve advertisers’ returns on ad spending and increasing its average revenue per user over time.
Future Growth
We forecast Meta’s sales growing at a 12% compound annual growth rate for the next five years, spearheaded primarily by an increase in average revenue per user with user growth also chipping in. We believe Meta has a strong opportunity ahead in Asia and the rest of the world.
Investments in AI
While the firm’s core business remains advertising, Meta has shown a proclivity to expand beyond its ad-based revenue model by investing heavily in hardware, via Reality Labs, and in AI, by investing in its own Llama large language model. While the firm’s investments in Reality Labs have been demonstrably unprofitable, we are more optimistic about Meta’s investments in AI. We view Meta’s AI investments, especially those aimed at improving the firm’s ad-targeting algorithms, as value-accretive.
Conclusion
Beyond ad targeting, Meta is also investing in consumer-facing AI, via its Llama chatbot, which is accessible to users across its applications. While a monetization strategy for this chatbot remains elusive in the near term, we believe the firm could drive increasing user engagement/time spent by allowing its users access to a chatbot assistant within Meta’s applications.
Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.
Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.
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