2. Meta Platforms Inc (NASDAQ:META)
Number of Hedge Fund Investors: 235
Smead Capital CEO Cole Smead explained in a latest program on CNBC why he believes Meta Platforms Inc (NASDAQ:META) is not an attractive stock when it comes to valuation.
“Let’s just use your discussion a second ago of Meta Platforms Inc (NASDAQ:META). If I back out the stock-based compensation out of what the street expects Meta to make this year, they’re not going to make $43 billion in free cash. They’re going to make $26 billion in free cash flow, a 40% reduction because that’s how much stock-based compensation cost them last year. Now, that’s still a lot of money, admittedly, Kelly—$43 billion—but when you compare it to the book value of the business at $180 billion, it means it’s producing about a 15% return on capital when you look at cash returns. Now, that’s fine, but when you trade at eight or nine times book, that’s impossible to compound money.”
Meta crushed expectations with the latest quarterly results but yet again pointed to higher expenses in the future. In 2025, it sees total operating expenses in a range of $114-$119 billion, with 19-25% y/y growth. Capex is expected to rise 61-74% y/y to $60-$65 billion, compared to just $37.3 billion in FY24. Advertising rose strongly but analysts believe it should be seen in the context of higher political ad spend and holiday quarter perspective. In 2025, the company might not be able to keep reporting double-digit growth in ad pricing amid weaker consumer spending and a cautious macroeconomic backdrop.
In the long term, Meta shares are expected to grow because of AI. How?
Meta Platforms (NASDAQ:META) is driving usage and ads revenue by improving its algorithms and user experience thanks to AI. Meta Platforms (NASDAQ:META)’s advancements in Reels and WhatsApp are helping manage CapEx growth as the company strives to stay competitive in AI. Meta Platforms (NASDAQ:META)’s substantial user base of 3.3 billion provides a data and distribution edge that could capture a significant share of the GenAI market.
Rowan Street Capital stated the following regarding Meta Platforms, Inc. (NASDAQ:META) in its Q4 2024 investor letter:
“Meta Platforms, Inc. (NASDAQ:META): Investment Initiated: April 2018: Internal Rate of Return (IRR*): 22% *IRR represents the annualized rate of return on an investment, accounting for the timing and magnitude of cash flows over the holding period.
For META, our 22% IRR aligns closely with the company’s compounded growth in earnings per share (EPS) and free cash flow per share during the 6 years holding period.
Looking ahead, Meta is expected to grow its revenues, earnings, and free cash flow per share at mid-teens rates over the next two years. There’s a good possibility that it could exceed these estimates, considering the breadth of growth initiatives currently in place, such as advancements in Al, monetization of Reels, expansion into business messaging, and the ongoing development of the metaverse…” (Click here to read the full text)
