Should You Buy the Dip in Meta Stock? | META Stock Analysis and Live Earnings Review

Meta Platforms earnings are out and the initial reaction from the marketplace is sending shares lower. Let's take a look at why the market was initially disappointed with Meta Platforms quarterly financial results. >> I want to thank The Motley Fool for sponsoring this video. Visit fool.com/parkev for the 10 best stocks to buy now. >> So right off the bat, CEO Mark Zuckerberg is saying that AI is accelerating their core business today while powering their next generation of products and opening the door to entirely new enterprise opportunities. The results are already showing and I'm optimistic about the potential ahead. And that's true. I have been seeing early signs of new business categories opening up for Meta Platforms. The company launching its own AI model, the company also renting out some of its excess data center capacity to generate revenue in that fashion. So that part of it statement is true. They are generating new sources of revenue. So the company reported 28% revenue growth year-over-year totaling $60.8 billion. That was up from the same time last year where they reported $47.5 billion in revenue. Notably, the revenue growth rate of 28% was a deceleration from the previous quarter. That's one area of disappointment. In the quarter which ended March 31st, the company generated 33% revenue growth. And since then, they've spent significant sums of money adding new data center capacity and new data centers have come online and yet the year-over-year growth rate decelerated. That was disappointing right off the bat. And then you've got income from operations that was down 8% year-over-year despite the fact that revenue was up by 28% year-over-year. So, you're starting to see the spending is outpacing um the revenue growth, which is leading profit to decline year-over-year. That's another disappointing factor. The company was forecasting revenue in the range of $58 to $61 billion for this upcoming quarter. So, at 60.8 billion they hit the higher end of their guidance. So, in that way that was a positive for the quarter. Meta reporting family daily active people came in at 3.6 billion people. That's an increase of 3% year-over-year. And compared with the previous quarter, that was also an increase. Remember, 3 months ago they reported 3.56 billion people. Now they have 3.6 billion people. That's an increase, and that was a relief because remember in the recently completed quarter they said that there was a decline in monthly active users because of internet disruptions in Iran as well as restrictions on access to WhatsApp in Russia. So, I was concerned that this would start a trend of Meta losing uh users, and that didn't happen. They actually added users quarter-over-quarter. That was one big positive. The company reporting ad impressions across their family of apps were up by 14%, and the average price per ad also increased by positive there. Remember in the previously completed quarter, the ad impressions increased by 19%, and the average price per ad increased by 12%. They continue reporting double-digit increases in ad impressions and average price per ad. That's positive in a couple of ways. Let me explain. So, ad impressions to me is a proxy for increasing user engagement. They're making the app more interesting and that's creating more engagement. People are logging on more frequently and when they are logging on, they're staying on longer and that's creating more opportunities to show advertisements. And then, the price per ad increasing by 12% demonstrates that they're delivering a better return on investment for marketers. And so, marketers are seeing those positive results and they're spending more money on the platform, which is increasing the average price per advertisement. That was also significantly positive. So, the capital return program, I think, is important for what's not there rather than what is there. They did make dividend payments of 1.35 billion dollars. But, what we haven't seen from Meta Platforms lately is a share buyback. Previously to their huge increases in capital investment, they had been spending tens of billions of dollars buying back stock. Those have all but been eliminated now that the company's in a cash crunch. They're spending so much money building these data centers, they don't have that much left over to buy back stock. This is something I was watching closely. Head count came in at 75,472, which was down 1% year-over-year. And this head count includes approximately 8,000 employees impacted by the May 2026 head count reduction, the majority of whom will no longer be reflected in their head count by the end of the third quarter of 2026. So, this figure is heading even lower. This is a sign that their internal use of artificial intelligence is adding to employee productivity. So, they can do the same amount of work with fewer people. And so, they're finding those internal efficiencies. Just a comparison from the previous quarter, so 3 months ago, they had 77,986 people, which was an increase of 1% year-over-year. So, just from the previous quarter, they've shed roughly 2,500 employees. And they're forecasting here another drop of about 8,000 employees. So, remember Meta Platforms, these are well-paid employees. It estimates suggest that the average employee salary at Meta is something in the range of $150,000 per year. And so, when they're letting go of 8,000 people, that's a big savings in terms of salary. And they're doing that because they're able to do more with the same amount of people. So, they generated $61 billion in revenue, which was 28% more from the same time last year. And they did so with 1% fewer people. I think that's where CEO Mark Zuckerberg is really encouraged is the company's ability to generate increasing revenue with fewer and fewer people. And that's creating an increase in the revenue per employee, efficiency of the company overall, return on invested capital, etc., etc. So, the company's forecasting third quarter revenue to come in at a range of $61 to $64 billion. That would be a very modest incremental increase from the $61 billion they just reported. So, at the midpoint, it would be an increase of about $1.5 billion. That's not very much of an increase. Additionally, they're raising their lower end to their expense outlook due to the $2.4 billion in charges to legal expenses. They now expect 2026 full-year total expenses to be in the range of 165 to 169 billion. Just 3 months ago, they told investors that their expenses would be between 162 to 169 billion. So, they increased the lower end of their guidance now to expect at least $165 billion in operating expenses for 2026. A quick look at the stock price action right now, it's down 6.9% 6.7% in the after-market hours. Investors are disappointed with the results. And what I've seen so far, it does look justified for the share price to be down given the bigger increase in expense and the slower than expected increase in revenue. So, they continue to expect to deliver operating income this year that's above 2025 operating income. So, that's a relief. So, even though their operating income dropped in this quarter compared to the same quarter last year, for the full year, they're still forecasting to grow their operating income. Here's the big number we were all looking out for, capital expenditures. They're including principal payments to be in the range of 130 to 145 billion. That's narrowed from their prior outlook of 125 to 145 billion. So, in one way, they're increasing their CapEx by increasing their midpoint, right? Previously, the midpoint was 135 billion. Now, the midpoint is 137.5 billion. So, a very small increase in capital expenditures. And that's surprising in some ways. I was expecting a bigger increase in capital expenditure, especially after last week we saw Alphabet raise their CapEx expectations by roughly $10 billion. Meta only increasing their CapEx estimate by roughly $2.5 billion and by increasing it by increasing the bottom end of the range of what they were expecting in capital expenditures. So, I'm curious about the company's cash flow from operations and comparing that with their purchases of property and equipment. So, let's go to the cash flow statement here and net cash provided by operations total $31.2 billion in the most recently completed quarter, 31.8 I should say. That was up from 25.5 in the same time last year, an increase of about $6 billion or in other words, about 25% growth in cash flow from operations in the same quarter last year. And $31.8 billion overall is large amount of cash flow from operations. Now, compared to their purchases of property and equipment, oh, they're heading into dangerous territory here of negative, but not quite yet. They spent $30 billion on purchases of property and equipment. And that was slightly below the cash flow from operations. So, their free cash flow is only about $1 billion, $1.7 billion in this recently completed quarter. That's down from about $9 billion in the same quarter last year as their CapEx nearly doubled while their cash flow from operations only increased by 25%. So, the pace of acceleration in capital expenditure now far outweighs the pace of growth in cash flow from operations. And this is a primary concern from investors now because companies are going to investors and asking for more money to fund their investments in AI. They're no longer just funding investments in AI from internally generated cash flow. They're also going back to investors, borrowing money in, you know, all cases, Alphabet, Microsoft, Amazon, Meta have all borrowed close to uh $300 billion over the over the previous two or three years to fund these investments in AI. And then you had Alphabet that went to the market and sold nearly $90 billion of stock. So, going to investors and asking for money because their spending is going so quickly, it's outpacing their cash flow. And Meta is now approaching that category where it too will turn negative in free cash flow if it continues at this pace, which it looks like they will because that's what they're forecasting in their CAPEX numbers and the profit are not increasing as quickly as their investments in artificial intelligence. This is concerning. Um on the one hand, I like that these companies have found a new category to allocate capital because remember 5 years ago or, you know, 7 years ago before AI, these companies were generating so much cash flow, they didn't know what to do with it. All they could do is just buy back stock. $64 billion Meta has generated in the recently completed 6 months. Annualized, this would be $128 billion. Before AI, before these CAPEX, they didn't know what to do with all this capital. They didn't have an area where they felt that it was going to generate a positive return on invested capital to put that money towards. And now with AI, they found this category where they feel it's generating positive ROIC. So, we are seeing revenue growth structurally higher than where it was before the company was investing in AI. We're seeing increasing engagement from users. People are spending more time. The number of ad impressions are increasing. The price per ad is increasing. The competitive advantage vis-à-vis its competition is widening because other social media companies cannot invest anywhere near the levels that Meta is investing in its platform. And so, the separation is widening. Meta was already the best social media company in the on the planet, arguably. And now with all of these investments, the difference between itself and its competition has widened and continues to widen. However, what's concerning to investors is the pace of investments in AI. Investors are growing uncomfortable with the difference between the cash flow from operations and the capital expenditures narrowing to such a large degree and turning negative. And investors are asking, "How long will this last? How long will we tolerate or we have to tolerate the spending on capital expenditures? Will this continue for 3 years, 5 years, or is this going to end at some point?" And we haven't heard any discussion from any of the companies about this, you know, reaching a peak and then kind of heading downward. Uh Alphabet said, "You can expect next year that we'll spend more on CapEx, significantly more on CapEx than we did this year." I haven't seen a similar statement from Meta, maybe they'll discuss it in the conference call. And if they do say something like, "This is probably peak spend and we'll return to declining CapEx and a bigger distance between CFO and CapEx." And that will likely reverse the drop that you're seeing here initially in the share price, but I don't think that's going to be the case. I think Meta CEO Zuckerberg is probably going to indicate that next year will be another big year of spending on CapEx, but the demonstration of revenue growth acceleration is what investors were hoping to see and we didn't see that. We saw deceleration instead of 33% revenue growth, we saw 28% revenue growth. We saw higher operating expenses. We saw revisions higher for their capital expenditures. So, overall, not what investors were hoping for from Meta Platforms so far. Of course, the conference call is probably happening as I'm speaking right now. And so, that will really feel a lot more information. But so far, this is a negative from what I've seen from the company, but not to such a large extent. It's not something that as a Meta shareholder myself, I'm panicking about. I would have liked to have seen better. But the figures are still pointing to a positive return on investment. I am encouraged by the company's ability to generate more revenue with fewer employees. I'm encouraged by the increases double digits in average revenue per user and impressions. I'm encouraged by the incremental growth in the monthly active user base. And remember, this is all happening amid a macroeconomic backdrop that's not good, Right? We've got two wars ongoing. The war in the Middle East is accelerating. It's um worsening. And then you've got the pressure from tariffs, right? Enterprises are still paying tariffs to import goods. And the trade barriers have been significantly negative for Meta. Uh some of the biggest advertisers on Meta's platforms were those Chinese-based companies like Temu and others that were investing significantly for advertising and those have pretty much uh erased. They're not investing as much anymore because not only did we have tariffs in place, we also had other increasing trade barriers. There was a loophole where companies outside of the United States could bring products into the United States as long as it was below that $800 threshold, they were able to bring products into the United States without paying a tariff. And now they have to pay a tariff on those. That loophole was also removed. And so that created a big jump in the effective tariff for a lot of those companies that were some of the biggest advertisers on Meta's platforms. So even amid this difficult macroeconomic backdrop, Meta is still generating 30% revenue growth. And that's all a result of improving effectiveness of the platform both on making it more engaging for consumers and increasing the return on advertising spending for its advertising partners. And so if we have a return to macroeconomic growth where the headwinds are removed, that could facilitate could be a catalyst to accelerate top-line growth revenue growth for Meta as advertisers and businesses get more bullish. Right now, businesses are not very bullish. The bulk of the spending you're seeing from business is towards artificial intelligence so that they can save money on labor. So that they can get increasing productivity on labor. Enterprises are not spending more money on expansions. They're not adding new products. They're not advertising. They're not excited about the macroeconomic outlook. Looking back at the price action, it's still down over 6% in the after market hours. Justifiably so. Maybe it shouldn't be down this much. Maybe it should be down a little bit less. We can argue about that. But I certainly think that what the company reported in the current quarter was an incremental decrease from an investor perspective. However, overall, I still think this is a very attractive stock to buy. Going into these quarterly earnings results, it was trading at a forward price to earnings of 15.9, which is the cheapest, near the cheapest you've been able to buy this stock for many, many years. Furthermore, my discounted cash flow valuation had the business worth $875. The current market price it was $585 at market close. It's now $550. So the difference between market price and intrinsic value is widening. And already for 2026, my estimates for free cash flow for Meta was very low. I'm only estimating $1.3 billion in free cash flow for Meta this year, down from roughly $43 billion last year. So significantly lower free cash flow I had already forecasted in my free cash flow estimate for Meta for 2026 and 2027. So this was something I was already anticipating because of what I had seen from others in the industry going lower and lower. So, overall, disappointing, to be sure. As a Meta Platforms shareholder myself, what I'll be doing is likely looking to add more shares. I was already interested in buying more Meta stock. I almost bought more today before the company announced the quarterly financial results, but I decided to wait until after the company reported results, and I was disappointed, to be sure, but overall, going into the quarter, the stock was already so undervalued, and now with the price decline countering the disappointing results, I feel that it's still a very attractive opportunity. Probably the next stock I'll add when I buy a stock, when I add a stock, it's likely going to be Meta Platforms. The timing, I'm not so sure about, but I'm very likely to add more Meta stock to my portfolio.