High AI Investment And EU Challenges Will Shape Future Prospects

Key Takeaways

• Increased CapEx for AI infrastructure could impact free cash flow and net earnings amid technological uncertainties and competitive pressures.
  
• Regulatory challenges in the EU and sustained Reality Labs losses may pressure revenue growth and operating margins, given compliance costs and advertiser spending reduction concerns.
  
• Meta's strategic AI focus aims to enhance advertising, user retention, and new revenue streams, driving substantial growth across its platforms and emerging technologies.

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.

• The increase in capital expenditures to a range of $64 billion to $72 billion for 2025, which exceeds prior expectations, could weigh on free cash flow and impact net earnings. This increased CapEx is mainly attributed to additional data center investments to support AI initiatives and higher expected costs of infrastructure hardware.
  
• There are regulatory challenges in the European Union, particularly around the Digital Markets Act compliance, which may force Meta to make modifications that could significantly impact user experience and revenue. This regulatory pressure may result in lower revenue growth or higher expenses related to compliance.
  
• The investment in Reality Labs continues to drive significant operating losses, with the segment reporting a $4.2 billion quarterly deficit. This persistent loss could negatively affect operating margins unless there's a breakthrough in VR and AI devices leading to substantial revenue generation.
  
• Concerns about a potential reduction in spend from key advertisers, such as China-based e-commerce businesses and other sectors such as gaming, could suppress advertising revenue growth. Combined with macroeconomic uncertainty, this may lead to revenue and earnings growth below current market expectations.
  
• The aggressive investment strategy in AI and infrastructure in the face of competition and technological uncertainties could risk longer payback periods or insufficient return on investment if market share gains or technological leadership are not achieved, potentially compressing future earnings.

Meta Platforms Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Meta Platforms compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Meta Platforms's revenue will grow by 11.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 39.1% today to 29.8% in 3 years time.
• The bearish analysts expect earnings to reach $70.8 billion (and earnings per share of $27.61) by about July 2028, up from $66.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.3x on those 2028 earnings, down from 26.9x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 17.4x.
• Analysts expect the number of shares outstanding to decline by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.61%, as per the Simply Wall St company report.

Meta Platforms Future Earnings Per Share Growth

Risks

• Meta's strategic focus on AI across various areas, such as improved advertising targeting and AI-driven creative options, could significantly boost revenue by enhancing advertising effectiveness and increasing the share of global GDP allocated to advertising.
  
• With a growing user base and increased engagement across platforms like Facebook, Instagram, and Threads, Meta's ability to recommend better content using AI may lead to higher user retention and subsequently boost revenue.
  
• Business messaging through platforms like WhatsApp and Messenger is poised to become a new revenue pillar, especially with AI facilitating business transactions even in developed countries, which could enhance overall revenue streams.
  
• The expansion of Meta AI and its integration into the company's ecosystem holds potential for substantial revenue growth through product recommendations, advertisements, and premium service offerings, as engagement scales over time.
  
• The success of AI devices, such as Ray-Ban Meta AI glasses and other next-generation computing platforms, represents a promising avenue for increased revenue and profit margins, particularly as more consumers adopt these emerging technologies.

Valuation

• The assumed bearish price target for Meta Platforms is $605.06, which represents two standard deviations below the consensus price target of $755.0. This valuation is based on what can be assumed as the expectations of Meta Platforms's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 $566.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $237.3 billion, earnings will come to $70.8 billion, and it would be trading on a PE ratio of 26.3x, assuming you use a discount rate of 7.6%.
• Given the current share price of $713.58, the bearish analyst price target of $605.06 is 17.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.