Are Meta's $90 Billion Expenses Risky for Investors?

Unlike most of its competitors, Meta Platforms (META -2.41%) isn't really limited by finances or cash when it comes to investing in future growth. In this Backstage Pass clip from "The AI/ML Show" recorded on Jan. 5, Motley Fool contributors Jose Najarro, Toby Bordelon, and Danny Vena discuss the risk-to-reward ratio for investors considering Meta stock.  

Jose Najarro: What really is scary, in my opinion, in forms of financials to some extent is total expense. Look at that big jump. Total expense for 2021 is expected to be somewhere between 70 or 71 million, but total expense for 2022 is expected to be about 91-97 billion. But this is a total expense here. The real question with total expense is, how much is it going to be cash related, and how much is it going to be stock-based compensation? Because they're going to be using a lot of this money to drive technical and product talent. They're going to be hiring a lot of engineers, a lot of salespeople. The real question is, out of that 20 billion or so, how much is it going to be cash and how much is it going to be stock-based. I wanted to showcase some of these increases in expense. But I also want to highlight that this is a company with plenty of cash flow.

Toby Bordelon: Before you move on, I just want to take a minute or two here, to point out how great position they are in when you look at what they're doing. I mean, you look at that expense increase and you think, so that's significant and extra 20-30 billion participating expenses. But what we do see that over the last trailing 12 months, that revenue they've got, they still generated 40 billion in net income. They have room to increase their expenses and still be profitable easily. What's the bigger issue is what you were talking about with the cash. All that CapEx they're charging for 2022 you take the high-end but report billion is less than their free cash flow for the trailing 12 months. It looks to me like they can probably fund almost all of that CapEx out of internally generated cash, which is phenomenal. That's without even touching the 58 billion they have on the balance sheet.

Jose Najarro: Exactly.

Toby Bordelon: Yeah, I mean, you look at the position and you think they are spending a lot of money, but they can afford it. Then when we start talking about some, I guess maybe less Nvidia, but more C3.ai, you ask yourself, can they compete? I don't know. Obviously you can compete, but look at what you're up against when you're talking about AI or something, you're up against a company like Meta that can pretty much spend as much money as it wants from internally generated cash. It puts them in a fantastic position looking at this new field. It's just hard to I think overstate that when you're talking about companies that could win, we don't know who is going to be the big winner here, there's probably going to be a lot of winners. But it's unlikely that Meta is not going to be a winner, I think given just the sheer amounts of cash they can throw at situation. At least that's my guess when I look at this.

Jose Najarro: Agreed. Go ahead, Danny.

Danny Vena: I wanted to tag on there just for a second, Toby. For those of our viewers that are not accounting geeks, like I am. I wanted to point out that when you think in terms of CapEx spend, that's not necessarily going to reduce their profits by that much. Because when you spend on CapEx, that gets divided up over the life of the assets that you are purchasing. If you're buying a server that says, say, a 10-year life on it then whatever you spend on that gets divided up and expensed over 10 years. It's not that Facebook/Meta is going to see their profits drop to nothing if they invest that amount of money. I just wanted to clarify that, like I said, for the non-accounting geeks among us.

Toby Bordelon: Right. That's a great point, Danny. It will obviously hit their cash unless they decide, hey, we can finance some of this stuff because we have no debt, and we have a ton of cash on our balance sheet. This is the type of company as a lender, you look at them and say, I will give you a lot of money at a very low interest rate if you want to borrow from me because I have zero doubts about you being unable to pay this back. When you talk about their ability to do some of this stuff, if they just decided, we have a great idea, we want to finance them with this, man.

Danny Vena: Didn't Apple borrow money and got somebody to pay them to take the money?

Toby Bordelon: Yeah, Apple borrowed money at an insane rate. It was pretty close to zero percent because it was just mind-boggling. But Meta could be in that scenario too. I guess the point, we're making here is that they're not really limited by finances or cash in terms of their ability to invest in future growth. Great position to be in, fantastic position to be in.

Jose Najarro: I agree, Toby, and I think both you and Danny made such a great point of how a great position that's in, and as an investor, personally as a holder of Facebook, I try to look at the risk and reward. I'm like, OK, maybe one year or two years of maybe a little bit less free cash flow, a little less cash flow from operations to some extent. But the rewards that if this is successful, this can be a huge mover. The bad side, if it doesn't become successful, Facebook still has its advertisement platforms that it could be like, OK, maybe we lost out on the year, maybe it lost out on the year-and-a-half, but we're still able, it's not really going to damage us completely. When I take a look at that risk-to-reward ratio like mentioned, I think it's in a great place.