Meta’s Mixed Q3 Performance: Investors Weigh Higher Costs Against Strong Revenue Gains

Meta stock (NASDAQ: META) has experienced a 3% decline over the past week but remains up about 60% for the year. The company disclosed its Q3 results, surpassing analyst expectations. Meta reported revenue of $40.6 billion and earnings of $6.03 per share, compared to consensus estimates of $40.2 billion and $5.25, respectively. Despite this positive news, investors reacted negatively due to rising costs. Let’s take a closer look at Meta’s quarterly performance and its implications for META stock.

Meta’s Q3 Results: A Closer Look

Meta Platforms’ revenues for Q3 reached $40.6 billion, marking a 19% year-over-year increase, supported by a 7% rise in ad impressions and an 11% increase in average price per ad. Additionally, family daily active people (DAP) grew by 5% to 3.29 billion. The majority of the company’s revenue still comes from advertising on Facebook, Instagram, Threads, and WhatsApp. Benefiting from its AI initiatives, the company is also focusing on generating more ad content through these advances.

Furthermore, Meta’s operating margin grew to 43%, up around 300 basis points year-over-year. This increase in revenue and margin contributed to earnings of $6.03 per share, a 37% rise compared to last year. Looking ahead, Meta anticipates fourth-quarter revenues between $45 billion and $48 billion.

Concerns Over Rising Costs

Investor sentiment shifted negatively with the company raising its capital spending guidance to $38 billion to $40 billion and increased investment plans for 2025. This spending deeply contrasts with the $27 billion that Meta allocated for capital expenditures in 2023. Much of the increased investment focuses on AI, particularly expanding data centers and infrastructure.

What This Means for META Stock Going Forward

Despite a solid 60% gain this year, META stock has been better than certain leading tech competitors: GOOG by 21%, AMZN by 28%, and MSFT by 9%. Presently, META stock appears fairly valued. We estimate Meta Platforms’ valuation at $560 per share, aligning closely with current trading levels. At this price point, META stock trades at 25 times the expected earnings of $22.65 for 2024, which is higher than its average price-to-earnings (P/E) ratio of 17 times over the past three years. An increase in valuation makes sense given the recent robust advertising growth. However, significant ongoing investments in AI carry the risk of not translating into meaningful earnings growth.

Historically, META stock has shown significant fluctuations since 2021. Its returns include 23% in 2021, a sharp decline of -64% in 2022, and a staggering 194% increase in 2023. This volatility contrasts with the Trefis High Quality (HQ) Portfolio of 30 stocks, which, despite being less volatile, has consistently outperformed the S&P 500 over the same period. The HQ Portfolio has demonstrated better returns with reduced risk, showcasing a steadier performance compared to the benchmark index.

While META stock seems well-priced for now, it is beneficial to compare Meta to its peers. For additional analysis, consider visiting Peer Comparisons.

[1] Returns as of 11/4/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.