Meta Q3 2024 Earnings Preview: Performance Expected to Exceed Expectations | Moomoo Research

Meta is set to release its Q3 earnings report after the market closes on October 30, Eastern Time, and market attention is extremely high. According to Bloomberg consensus estimates, the company is expected to achieve a year-over-year revenue growth of 17.83% to $40.235 billion in Q3 2024, with diluted EPS anticipated to rise by 19.22% year-over-year to $5.23.

Meta's stock has performed exceptionally well this year, with an increase of over 60% year-to-date. As we anticipate another strong performance from Meta this quarter, how should we strategize our investment?

Advertising revenue is META's primary source of income, and it is expected that the company's advertising revenue growth will remain around 20% this quarter, following a growth rate of approximately 21% last quarter. The reasons are as follows:

1. The Strong U.S. Economy Continues to Support Advertising Revenue Growth

From the macroeconomic data for the U.S. in Q3, retail sales in July, August, and September all showed positive month-on-month growth. In September, retail sales increased by 0.4% month-on-month, exceeding market expectations, indicating strong consumer spending and minimal signs of a substantive economic downturn. With the support of a robust U.S. economy, advertising prices are expected to continue to rebound, and Q3 2024 advertising revenue is likely to perform well.Chart: U.S. Retail Month-on-Month Growth Rate as of September 2024 (%)

Source: U.S. Census Bureau

Chart: Year-over-Year Growth Rate of Global Average Advertising Prices from Q2 2022 to Q2 2024 (%)

Source: Company Announcements

2. Ongoing Expansion of Online Advertising Market Share Benefits META

The global online advertising market share continues to grow. According to relevant market research data, in 2024, Meta's advertising spending is rapidly catching up to that of cable television, and it is expected to surpass cable television advertising spending in 2025.

Chart: Global Advertising Spending for Meta vs. Cable Television (in billions)

Source: WARC Media

3. Strong Social Ecosystem Advantage

Meta owns globally recognized social platforms such as Facebook, Instagram, and WhatsApp, holding a nearly monopolistic position in the social ecosystem. With such a large user base, data from Q2 2024 shows that the number of active users on the apps continues to rise steadily, reflecting a strong social ecosystem barrier. With substantial user traffic, Meta naturally becomes the preferred choice for many advertisers.Chart: Daily Active Users of Social Product Family from Q2 2022 to Q2 2024 (in billions)

Source: Company Announcements

4. AI Enhancing Advertising ROI

Meta has been utilizing AI to improve how it targets users for ads, thereby increasing the efficiency of its most profitable advertising business. In recent years, Meta has launched the AI-driven advertising tool Advantage+, which uses AI and automation technology to help advertisers enhance marketing and promotional effectiveness, thereby improving advertising ROI.Additionally, Meta's AI technology enables precise ad placements and intelligent optimization of ad performance. By real-time monitoring and analysis of advertising data, it identifies key factors affecting ad performance. These algorithms can dynamically adjust ad content and placement strategies based on user feedback and behavioral data.

5. U.S. Election Driving Significant Growth in Political Advertising Spending

According to advertising analytics firm MediaRadar CMAG, advertising spending for the 2024 presidential election is nearing $1.2 billion, and total political advertising expenditures, including congressional and other elections, amount to as much as $12 billion, nearly three times the advertising budget for the 2016 election.Historically, advertising and politics have always been closely intertwined. In past U.S. presidential elections, advertising spending has shown a significant upward trend. With the rise and development of digital media, the share of digital advertising in political advertising has also been increasing year by year. For digital advertising giants like Meta, the growth in political advertising will undoubtedly bring substantial commercial benefits.

The company is expected to see continued growth in capital expenditures, primarily due to ongoing investments in AI infrastructure and Reality Labs. From the perspective of AI investments and returns among tech giants, Meta has a clear direction for commercializing AI, with relatively high returns. However, losses from Reality Labs are anticipated to continue to widen. Recently, the company launched its latest headset product, Quest 3S, priced at only $299, which offers a better cost-performance ratio compared to Apple's Vision Pro, helping to enhance market share. Yet, in the short term, Reality Labs is still unlikely to achieve profitability.

Chart: Capital Expenditures in Q2 2024 (in millions)

Source: Company Announcements

From an operational cost perspective, the company’s operating expenses this quarter are expected to remain roughly flat compared to the previous quarter. Due to the low base of operating expenses in Q3 2023, there will be a higher year-over-year growth rate for operating expenses in Q4 2024. However, considering that the company's revenue growth will still outpace the growth of expenses, there remains room for improvement in profit margins.

Regarding free cash flow, the company is expected to see free cash flow remain relatively stable compared to the previous quarter, with the increase in capital expenditures offsetting the growth in net profit. For the full year, the company’s free cash flow in 2024 is expected to see a slight increase compared to 2023 ($43.847 billion).

Chart: Free Cash Flow of the Company from Q2 2022 to Q2 2024 (in millions)

Source: Company Announcements

Stable cash flow supports shareholder returns. The remaining buyback scale is $60.06 billion, with plans to repurchase around $40 billion in both 2024 and 2025, along with approximately $5.08 billion allocated annually for dividends. The current market capitalization of the company is $1.44 trillion, with an annualized shareholder return rate of about 3.1%.

The company anticipates Q3 revenue in the range of $38.5 billion to $41 billion, with the current Bloomberg consensus estimate at $40.235 billion, sitting at the upper end of the guidance.

The U.S. economy remains robust, the online advertising market share continues to grow, and the company’s advertising business is poised to benefit. Additionally, Meta possesses a vast social ecosystem advantage, and its strong AI capabilities are continuously optimizing advertising tools. Against the backdrop of significant increases in political advertising spending for the 2024 U.S. elections, Meta's advertising revenue growth is expected to exceed both company and market expectations. Regarding EPS, the anticipated improvement in profit margins is likely to drive growth of over 20%.

In terms of shareholder returns, the company continues its share buyback and dividend policies. With a current market capitalization of $1.44 trillion, the annualized shareholder return rate is about 3.1%. The company values shareholder returns and is expected to increase buyback and dividend scales following a significant rise in free cash flow in 2026.

Regarding valuation, the current stock price is $567.78, with a trailing PE ratio of 29.04x. The forward PE for 2024 is estimated to be around 26x, indicating a relatively reasonable valuation.