AI, WhatsApp And Messenger Will Boost Digital Engagement

Key Takeaways

• Focus on AI to improve ad targeting and creativity may increase revenue as advertising grows globally.
  
• Business messaging through WhatsApp and Messenger could expand commerce capabilities and positively impact revenues and margins.
  
• Increased AI investments and operational challenges in Europe could strain profitability, while Reality Labs losses and high capital expenditures risk affecting cash flow and shareholder returns.

Catalysts

Engages in the development of products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality and mixed reality headsets, augmented reality, and wearables worldwide.

• Meta's focus on AI, particularly in improved advertising, is likely to enhance revenue by automating ad targeting and creative processes, which could result in advertising becoming a larger share of GDP globally.
  
• The growth and engagement of new and existing content types suggest increased user interaction, which could lead to higher ad impressions and revenue across Meta's apps.
  
• Business messaging, particularly through WhatsApp and Messenger, could unlock significant growth by expanding commerce capabilities in higher labor cost markets, impacting both revenues and net margins.
  
• Development of Meta AI as a personalized digital assistant and its integration into various apps could drive increased user engagement and potentially lead to future revenue streams through ads and premium services.
  
• AI devices, such as AI glasses and VR headsets, may drive future revenue growth and market presence by expanding Meta’s ecosystem and enhancing user interaction with digital and physical worlds.

Meta Platforms Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Meta Platforms's revenue will grow by 12.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.1% today to 35.3% in 3 years time.
• Analysts expect earnings to reach $86.0 billion (and earnings per share of $33.73) by about May 2028, up from $66.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $95.2 billion in earnings, and the most bearish expecting $73.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.8x on those 2028 earnings, up from 22.2x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 0.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.37%, as per the Simply Wall St company report.

Meta Platforms Future Earnings Per Share Growth

Risks

• The increased investment in AI and infrastructure signifies significant upfront costs, which may pressure net margins and overall profitability.
  
• The planned modifications in response to the European Commission's decision may adversely affect user experience and reduce revenue from the European region, impacting overall earnings.
  
• Heavy reliance on AI advancements for future business messaging revenue in high-cost labor markets presents a risk if the necessary AI capabilities do not materialize timely, potentially affecting revenue growth.
  
• The Reality Labs segment is reporting persistent operating losses, suggesting continued financial strain and risk if these losses do not convert to profitability, adversely affecting the company's earnings and operating margins.
  
• Rising costs for infrastructure hardware and data center investments could further increase capital expenditures, impacting free cash flow and the ability to return capital to shareholders.

Valuation

• The analysts have a consensus price target of $703.891 for Meta Platforms based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $935.0, and the most bearish reporting a price target of just $466.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $243.6 billion, earnings will come to $86.0 billion, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $587.31, the analyst price target of $703.89 is 16.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.