* After taking a hard look at Meta’s shares and its capital spending plans, here’s where we may initiate a holding.
Since adding Meta Platforms (META) to the TheStreet Pro Portfolio Bullpen in early April, the shares fell to a low of $430 post-March quarter earnings before rebounding, but are still more than 9% lower. Consensus expectations, following that earnings report, point to revenue growth of 18% and EPS growth of 36% this year compared to 2023. What is weighing on the shares, however, is a 52% explosion in Meta’s capital spending to $35 billion-$40 billion this year, up from its prior guidance of $30 billion-$37 billion.
We've talked about that spending bump as a positive tailwind for our Nvidia undefined and Marvell Technology (MRVL) holdings, but as it relates to Meta, that capital spending represents 22%-25% of 2024 consensus revenue. The last time we saw Meta’s capital spending at such levels, in 2018-2019 and 2022, the company’s earnings growth slowed and then contracted. In 2018-2019 that translated into META’s shares falling from $175 to $125 as the market came under pressure. In 2022, META shares cratered even compared to the more than 19% fall in the S&P 500.
Looking between those years, META shares performed strongly in 2020-2021 and 2023 when capital spending leveled off and or declined as a percentage of revenue to an average of 16.7% in 2020-2021 and 18.0% in 2023. Underneath those figures, Meta was able to reap the benefits as those investments drove a resurgence in its top line with revenue rising 22% in 2020, 37% in 2021, and 16% in 2023 after falling 1% in 2022.
The Right Time to Buy
We’ve seen this pattern with other companies when they’ve embarked upon capital spending sprees, which pressured margins and stock prices. The right time to pick up those shares was when the company was nearing the end of that spending spree and on the cusp of realizing those benefits.
Currently, the market consensus sees Meta’s capital spending rising another 10% in 2025 to just under $41 billion, a potentially modest drop compared to 2024 but still meaningfully above 2023’s 18.0% level. That 2025 figure reflects management’s March earnings conference call comment that it expects capex “will continue to increase next year as we invest aggressively to support our ambitious AI research and product development efforts.”
At best these concerns could keep the META shares rangebound, but as investors, we have to ask that even knowing this, where would it make sense to start adding some shares to the Portfolio?
Valuation
If we employ the P/E and market cap-to-revenue multiples at which META shares bottomed out in 2018-2019 they suggest a range between $405-$420. Other historical metrics expand that range to $405-$435.
In terms of upside, META is currently trading at 23x expected 2024 EPS, but with that rate of growth expected to slow this year and next compared to the 73% posted in 2023, the odds of seeing the stock trade at the 2023 peak P/E multiple of 24.3x is rather low, in our view. That suggests near-term upside in the coming quarters is likely capped closer between $485-$500.
Putting those pieces together, we’d be interested in starting a position in META shares if they found their way to $420-$430. Should the company signal its capital spending plan for 2025 will decline in absolute dollars compared to this year, that would be another reason for us to reconsider META. For now, we’ll be content to have positions in companies poised to benefit from Meta’s capital spending plans.
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At the time of publication, TheStreet Pro Portfolio was long NVDA and MRVL.