Meta Platforms hasn’t had such a great start to 2022. The release of the company’s disastrous fourth-quarter results in February caused a one-day sell-off that saw its share price decline by almost $100 a piece, with the stock now down overall by more than 40% year-to-date.
Fortunately, the firm’s latest Q1 earnings report finally delivered some positive news for investors. Daily active users were up 4% to 1.96 million, while the company’s net income, which was down 21%, nevertheless came in higher than analysts’ expectations. Facebook was rewarded with its stock price spiking 17.5% in post-market trading, while Wall Street breathed a collective sigh of relief that the results were not as bad as previously thought .
One metric that did stand out was FB’s expected capital expenditures for the year. The company reiterated its guidance – first outlined in November 2021 – that it was still on track for 2022’s spend of somewhere in the region of $29-34 billion.
Indeed, the planned investment is actually Meta Platform’s biggest annual CapEx yet. Since first reaching the $1 billion threshold in 2012, the firm expanded its capital expenditures every year until 2020, when it deferred $3 billion of infrastructure spend due to the outbreak of COVID-19. That meant that, until now, 2019’s CapEx of $19 billion was its largest on record.
To get an idea of just how big that is, the roughly $32 billion of cash put aside for new and existing projects is 33% larger than NASA’s annual budget of $24 billion.
Given that NASA uses its funds for things like Space Operations, Heliophysics, Human Exploration and Planetary Defence, you might be wondering what on earth Facebook is going to do with its own cash reserves.
The company’s given us a few clues. And although it’s not quite on the same scale as a mission to Mars – or advancing new nuclear thermal propulsion technology – for Meta shareholders it might just be as exciting.
Data Centers and Supercomputers
During the company’s latest Q1 earnings call, FB’s chief financial officer, David Wehner, outlined how the business was to put its massive capital expenditures to use over the course of the coming year. Not surprisingly, high up on the agenda was investment in the firm’s servers, data centers and network infrastructure.
More interesting, perhaps, is Meta’s focus on improving its artificial intelligence (AI) and machine learning capabilities. This is important to Facebook for several reasons.
Firstly, advertising revenue is absolutely critical to FB’s short-term and long-term success. However, the business faces some pretty severe headwinds on this front, not least the well-publicized changes to Apple’s privacy rules which make it harder for Meta to sell targeted ads to its customers.
That said, with advances to its AI algorithms, Facebook can begin to compete again, offering, in the words of David Wehner, better “performance and relevance” for its paying clients. And those advances can’t come quick enough – Facebook’s price per advertisement fell 8% year-on-year, even if its ad impressions did increase 15% over the same period.
Secondly, Facebook is committed to a number of projects using deep-learning to understand “the origins of human intelligence”. While these projects are certainly worthwhile on a purely scientific basis, they’re also likely to be big revenue spinners for the firm further down the line.
For example, Meta’s newly unveiled AI Research SuperCluster supercomputer is working on training models in natural-language processing, which will help save money through autonomous content-moderation algorithms, and enhance its augmented-reality features that will play a major role in the coming metaverse.
Revenues Are Slowing Down
Despite its ambitious capital expenditure plans, Meta’s also having to trim some of its spending in other segments too.
A less-than-stellar revenue growth of just 7% – its weakest on record – has meant that the business needs to make some cost-cutting measures along the way. The company has decided to begin with its “talent pipeline”, which will see hiring for some mid- and senior-level jobs curtailed.
As such, Facebook is also downgrading its annual operating expense guidance as well. Its previous estimate of $90-95 billion has now been revised to just $87-92 billion.
Is Meta Stock Still Worth Buying?
Facebook’s shares have had a rough time over the past few quarters, but, from a valuation perspective, the company is trading fairly inexpensively. The business is highly profitable – with an EBITDA margin of 44% – while its forward GAAP P/E multiple is slightly better than the wider Communications Services sector at 17x.
Furthermore, Facebook boasts a massive user base, from which it can successfully extract some equally massive cash flows. Its monthly active users was a staggering 3.64 billion during Q1, and it took in a total of $58 billion in cash from operating activities in 2021, up from $39 billion in 2020.
However, investors should be worried that the company is now at the point where it’s starting to lose customers, and the metaverse, though promising, is still something of a wildcard.
But the fundamentals of the business remain solid, and it’s reassuring that Facebook is reinvesting so much capital back into the company. Indeed, Meta just bought-up $9.39 billion of its Class A common stock – which should signal that the firm is still bullish on its own prospects, even if it has its fair share of skeptics.