Meta Soars On Massive Beat And Dividends

Article Thesis

Meta Platforms (NASDAQ:META) reported strong quarterly results and announced that it would begin paying dividends on top of that. The market reacted very positively to this news. While shares are not as inexpensive as they used to be, Meta Platforms remains a strong high-quality growth pick.

What Happened?

We can see the headline results in the following screencap from Seeking Alpha:

We see that the company beat estimates on both lines, which was another strong showing by the Mark Zuckerberg-led social media giant.

Meta Platforms’ revenue growth of 25%, relative to the previous year’s quarter, was strong in absolute terms and compares very favorably to the growth other Magnificent 7 stocks are generating. Tesla (TSLA), the first to report, showed revenue growth of just 4%, while Microsoft (MSFT) and Alphabet (GOOG) (GOOGL) saw their sales expand at a mid-teens growth rate. Meta was able to outperform expectations by more than 2%, showing that Wall Street analysts continue to underestimate the company meaningfully.

We see the same when we look at Meta Platforms’ earnings per share performance, as expectations were beaten by a pretty nice 8%. Even better, the year-over-year growth rate was excellent: Meta Platforms saw its profit explode upwards by 203%! While the comparison was made relatively easy by the fact that Q4 of 2022 was a rather weak quarter profit-wise, due to high Metaverse investments, Meta Platforms’ profit growth rate was still excellent.

The good news doesn’t end here, however, as the company also made a surprise announcement – Meta Platforms will begin making dividend payments in March. While the first dividend payment of $0.50 per share is not especially high, at $2 per share annualized, the market was still positively surprised by the news.

The market reacted very positively to this news. At the time of writing, Meta Platforms is trading at $454 per share in after-hours trading, which pencils out to a 15% share price gain. If that holds into the regular session on Friday, it would mean a new all-time high (by a wide margin) for the company.

Meta Platforms: Excellent Execution Continues

Meta Platforms was very out of favor not too long ago. A growth slowdown and margin pressures made many investors bearish on the stock, but management remained optimistic. Mark Zuckerberg and his team believe that the AI and Metaverse investments will pay off, and they have increased their focus on improving Meta’s profitability via cost-cutting and efficiency measures. As we see today, that’s working out very well.

Meta Platforms continues to see encouraging user growth across its different platforms, despite the fact that they are already massive in scale. Facebook, the biggest entity for Meta, grew its daily active users by 6% year over year, showing the network is far from dead – instead, it remains on a growth track. Looking at all of Meta’s platforms, i.e. when we also include Instagram and WhatsApp, the daily user count grew by an even better 8% compared to the previous year’s quarter. While the company had an even better relative growth rate five or 10 years ago, I believe that an 8% annual user count growth rate is excellent for a company that has billions of users already. The growth shows that Meta’s different platforms remain highly relevant for users and that business growth potential remains, which bodes well for the foreseeable future, I believe.

Of course, revenue growth is not solely dependent on user growth. The company also can increase its revenue per user, either by showing more ads to its users or by increasing the pricing for showing ads to its users. Revenue per user has been on an upward trend for a while, and that continued during the fourth quarter. With momentum being on Meta’s side, I would not be surprised if we see another strong showing during the current quarter and possibly throughout fiscal 2024.

Profits benefited from higher revenues, but the cost-cutting measures and efficiency-improving decisions that Meta Platforms has made over the last year also played a role in the excellent profit growth the company has showcased on a year-over-year basis. Meta Platforms has, like some other major tech companies, been cutting its headcount. Some jobs were redundant or not creating meaningful value for the company and its shareholders, which is why headcount reductions made sense. Getting rid of unused office space and cutting back on unnecessary business travel are some of the other efficiency measures Meta Platforms took, and they paid off very handsomely: The company saw its operating margin expand from 20% to 41% over the last year, which is outstanding – I don’t remember ever seeing a 2,000-plus base point margin improvement in a single year.

It’s worth noting that Meta Platforms also benefited from a somewhat lower tax rate during the fourth quarter, which gave an additional boost to Meta’s net income. It’s unlikely that the tax rate will head lower forever, thus this likely was a one-time gain, but apart from that Meta’s results look great to me and bode well for the company’s performance during the current year and hopefully beyond.

Surprising Dividend News

The fact that Meta Platforms will pay a $2 per share annual dividend going forward was well-received by many investors, although there are likely some that will question whether this means that Meta will invest less in its business going forward. I believe that a company can invest in attractive growth areas while paying dividends at the same time – the introduction of a dividend does not mean that a company will stop growing at all. There are several examples that show that the introduction of a dividend does not mean that growth will end or that a company will become “boring”:

– Microsoft introduced a dividend in 2003. Since then, the company has grown massively and has generated a total return of more than 1,100%.

– Apple (AAPL) has introduced a dividend in 2012. Since then, the company has shown highly compelling business growth and introduced new products, while total returns have come in at more than 1,200% over the last 12 years.

A dividend introduction does not guarantee returns like these, of course, but I believe that these examples show that a major tech company introducing a dividend is far from a reason to be anxious. Meta Platforms also doesn’t have to slow down its investments to pay for this dividend – its cash flows are, by far, high enough to finance huge shareholder returns and significant investments at the same time. Over the last year, free cash flows totaled $43 billion, with the Q4 pace being even higher than that ($46 billion annualized). Meta Platforms could thus make dividend payments (around $5 billion per year at the current level), buy back shares, invest in inorganic growth, and strengthen the balance sheet at the same time – note that organic investments are already accounted for in the free cash flow calculation. In fact, Meta’s free cash flows are so high that the company did announce a new $50 billion buyback authorization on top of introducing a dividend.

Is Meta A Good Investment?

Meta Platforms was an excellent investment last year: It had strong brands, great leadership, and it was very cheap. Today, it still has strong brands and great leadership, but it isn’t very cheap anymore. Shares are trading for 22x net profits today, or 25x net profits if the after-hours price jump holds into the next session. I believe that this is far from unreasonable, but it’s not a bargain valuation any longer.

Meta performs well operationally, growth remains compelling, there’s a lot of potential in AI, the balance sheet is strong, and the company is returning billions of cash to its owners thanks to strong free cash generation. I remain bullish on the company but want to note that it’s not quite as attractive as one year ago, when it was out of favor and thus very inexpensive.