Meta Platforms Stock: What Is The 2025 Forecast? (2024)

Introduction; Why is FB Stock Up?

Meta Platforms Inc. (FB) (formerly Facebook) reported Q1 2022 results overnight (Wednesday, April 27). Shares rose 18.4% aftermarket to $207.09.

Investors were encouraged by evidence that FB's strategy is working. Impressions growth was strong, user numbers rose, and management continues to expect revenue growth to reaccelerate in H2. In addition, expense growth is slowing and CEO Mark Zuckerberg explicitly committed to growing Meta's earnings over the next several years despite Metaverse investments.

We initiated our Buy rating on Meta in March 2019. Even with yesterday's rebound, Meta stock remains 46% below its September 2021 peak, and is down 31% over the past year (though still up 21% since our initiation):

FB shares are at 14.4x 2021 EPS. We expect EPS to shrink 17.5% in 2022, but to return to low-teens growth thereafter. Our forecasts indicate an exit price of nearly $500 and a total return of 240% (26.9% annualized) by 2025 year-end.

FB Buy Case Recap

Our investment case has been based on the belief Meta will grow its EPS sustainably at a double-digit percentage CAGR long-term, due to:

• The number of users, the number of ads per user, and the revenue per ad for the Meta Platforms app family should all grow over time

• The number of users will continue to grow globally thanks to newer geographies and Meta continuing to offer new features and services
• The number of ads per user will continue to grow thanks to the same new features and services
• Revenue per ad is underpinned by the unique value of Meta ads, superior to other media; ad price also tends to grow faster than GDP
• EBIT margins should be higher in the long run, as Meta is a platform business with natural operational leverage

The pandemic has accelerated Meta's business, with consumers spending more time on social media and businesses needing to attract customers in new ways. This helped Meta grow its ad revenues by 21.6% in 2020 and 34.6% in 2021, and its Adjusted EPS by 14.4% and 36.4%, respectively.

Meta's share price collapsed 26% the day after Q4 2021 results in February, after management guided to much lower ad revenue growth (3-11%) in Q1 2022, and warned about the impact of competition from TikTok and anti-tracking changes in Apple's (AAPL) iOS mobile platform.

Growth did indeed slow in Q1, and will remain low in Q2, but Q1 results provide evidence that Meta will resume its long-term earnings growth.

FB Q1 2022 Results Headlines

Meta's ad revenues grew 9.6% year-on-year in Q1 2022; including currency headwinds, total revenues grew 6.6%. Cost & Expenses grew much more, by 31.0%, which meant EBIT was 25.1% lower. EPS fell 17.4%, with the decline mitigated by a 4.9% reduction in the share count after buybacks:

Comparisons with Q4 2021 are not valid as Q4 included the holiday season.

The EBIT decline in Q1 2022 was disappointing. However, EBIT at Meta's core Family of Apps segment only fell 13.0%, whereas the small Reality Labs segment saw its Operating Loss expanded 62.0%, after costs rose 54.8% as FB continued to raise its Metaverse investments during the quarter:

FB guided to Q2 2022 total revenues of $28-$30bn, flat-ish sequentially and down 0.3% year-on-year (the latter after a 3 ppt currency headwind).

However, Q1 2022 results contained evidence that Meta's strategy is on track, and that its earnings growth will resume soon.

Growth Deceleration Not As Bad As It Looks

On the surface, Meta's ad revenue growth rates in Q1 and Q2 2022 represent the continuation of a down trend since Q2 2021:

However, each quarter's year-on-year growth is also influenced by the growth rate the year before, and Q1 and Q2 2022 both have strong prior-year comparables, with Q2 2021's growth being close to 10 ppt higher than Q1's:

So the deceleration in revenue growth is not as bad as it looks. To the extent growth decelerated, management attributed it to the following:

• A slowdown in e-commerce that grew quickly during the pandemic
• Ongoing targeting and measurement challenges with iOS
• The loss of revenues in Russia after the invasion of Ukraine
• The reduction in ad spend in Europe after the invasion of Ukraine

The post-COVID slowdown in e-commerce and the invasion of Ukraine are one-off events, while the challenge from Apple iOS's App Tracking Transparency ("ATT") features has not worsened and is being mitigated.

Progress Against iOS Anti-Tracking Features

The revenue impact of iOS ATT changes remains at approx. $10bn (some of which already materialized in 2021), and is being mitigated with technology. As Meta executives explained on the earnings call:

We shared our estimated $10bn impact on ATT last quarter to give a sense of the order of magnitude, and we believe it’s still to be that order of magnitude on the expected impact ... it’s not a lapping. There was an impact from ATT in the second half of last year as well"

Dave Wehner, Meta CFO

"Targeting and measuring performance ... On the first, we are improving our systems as we test and learn ... and we're working on automating tools that will help advertisers target better and we have to do it with less data ... On measurement, we've been able to close a good part of the under-reporting gap and shared that with advertisers, but the rest of the gap will take us longer to close."

Sheryl Sandberg, Meta COO

Key iOS ATT features were added in April 2021, and became more impactful after Apple pushed all users to update their phones over the summer. Meta expects its revenue growth to reaccelerate in 2022 after lapping these dates, although there is always uncertainty around regulations (notably the European Union's upcoming Digital Markets Act) and further iOS changes (Meta do not have views to share on iOS 16 at this stage).

Getting Traction in Short-Form Video

Q2 2021 results show Meta is getting traction in short-form video.

Year-on-year ad revenue growth of 6.1% (after currency headwinds) consists of a 15% growth in the number of impressions and an 8% drop in the average value per ad. These numbers are consistent with Meta's stated goal to grow its Reels video offering despite its current lower monetization rate compared to older surfaces. Management stated that "video surfaces on Facebook were a significant source of revenue growth" in Q1.

CEO Mark Zuckerberg also stated that Reels represented 20% of all time spent on Instagram, and video represented 50% of all time spent on Facebook.

Continuing User Growth, Excluding Russia

Meta user numbers have also continued to grow, demonstrating strong user engagement with its apps even as short-form videos gain popularity. Monthly Active Users ("MAUs") and Daily Active Users ("DAUs") of Facebook, as well as Monthly Active People ("MAP") and Daily Active People ("DAP") of Meta's family of apps, were all higher sequentially and year-on-year:

MAUs and DAUs rose sequentially in all regions except Europe, where Russia's ban on Facebook caused a decline. (Europe-only MAP and DAP figures are not disclosed.) As some Russian users exited after the end of Q1, Q2 would also be impacted, and Meta expects global MAU to be "flat to down sequentially" that quarter. This is a one-off impact and Russia was just 1.5% of revenues.

Slowing Expenses to Ensure Profit Growth

A key announcement with Q1 2022 results was that Meta will be slowing its expense growth to offset slower revenue growth. Management also explicitly committed to growing Meta's earnings over the next several years:

With our current business growth levels, we're now planning to slow the pace of some of our investments ... On the Family of Apps side, I am confident that we can return to better revenue growth rates over time and sustain high operating margins ... Over the next several years our goal from a financial perspective is to generate sufficient operating income growth from Family of Apps to fund the growth of investment in Reality Labs while still growing our overall profitability. Unfortunately, that's not going to happen in 2022 given the revenue headwinds, but longer term that is our goal and our expectation."

Mark Zuckerberg, Meta CEO (Q1 2022 earnings call)

For 2022, this means expenses are now expected to be $87-$92bn, compared to $90-$95bn previously. CapEx guidance remains unchanged at $29-$34bn.

EPS Likely To Decline 20% in 2022

We believe revenue growth could return to 10% in H2 2022. Using actual Q1 and guided Q2 figures, this implies full-year revenue growth of 6.7%:

Using the mid-point of the expenses outlook, this implies EBIT will decline by approx. 22% in 2022:

With the benefit of share buybacks, EPS should decline by less than 20%.

Valuation: FB Stock Key Metrics

At $207.09, relative to 2021 financials, Meta stock is trading at a 14.4x P/E and a 4.2% Free Cash Flow ("FCF") Yield:

If we assume a 20% decline in both EPS and FCF this year (and ignore the benefits of buybacks), Meta stock is on an 18x P/E and 3.4% FCF Yield relative to 2022 financials.

Many mature consumer staples companies trade at much higher P/Es, including P&G (PG) (27.9x) and Coca-Cola (KO) (27.7x). Assuming Meta could return to double-digit EPS growth, its current valuation represents a bargain.

Facebook repurchased $9.4bn of its shares in Q1, more than twice than the year before ($3.9bn). It has $43.9bn of cash, equivalent to 7.7% of its current market capitalization.

What Is FB Stock's 2025 Forecast?

We adjust the assumptions in our forecasts slightly:

• 2022 Net Income decline of 22% (was 20%)
• From 2023, Net Income to grow by 10% each year (unchanged)
• From 2022, share count to fall by 3% a year (was 0.5%)
• P/E at 30.0x at exit (unchanged)
• No dividends (unchanged)

The new 2025 EPS forecast of $16.56 is 11% higher than before ($14.96). The overall 2021-25 EPS CAGR is just 4.7% in our forecasts, and largely powered by buybacks, as our 2025 Net Income is only 6.4% higher than 2019:

With FB stock at $237.09, we expect an exit price of $497 and a total return of 140% (26.9% annualized) by 2025 year-end.

Is FB Stock A Buy, Sell, or Hold? Conclusion

FB shares rose 18.4% to $207 after results, but are still down 31% over the past year. We believe they can go to $500 by 2025.

Revenues rose just 6.6% year-on-year in Q1 and are guided to be down slightly in Q2, but there is evidence that FB's strategy is working.

FB is making progress against iOS anti-tracking features and gaining traction in short-form video. Growth should re-accelerate in H2.

Just as importantly, management is slowing expense growth and Mark Zuckerberg has explicitly committed to growing group earnings.

With FB stock at $207.09, we expect a total return of 140% (26.9% annualized) by 2025 year-end.

We reiterate our Buy rating on Meta Platforms stock.