Meta Platforms (META 1.89%) finally got some redemption Wednesday afternoon (April 27). Shares of the beaten-down social media stock jumped 18% after hours, potentially signaling that the worst for the company may be behind it. Despite a double-digit pop, the results weren't as strong as one might think.
Revenue increased just 7%, the weakest performance in its history as a publicly-traded company, to $27.9 billion, missing estimates at $28.2 billion. On the bottom line, earnings per share fell from $3.30 to $2.72, but that still beat expectations at $2.56.
Guidance was also modest, with management calling for $28 billion to $30 billion in revenue in the second quarter, which implies flat to 7.5% revenue growth and was worse than expectations at $30.6 billion.
Based on those numbers, it seems surprising that Facebook jumped nearly 20%, but there are three main reasons why the market was cheering the report.
1. User growth is back
Meta plunged on its Q4 earnings report back in February for two major reasons. First, it said growth would slow significantly in 2022, and second, user growth suddenly stalled, coming in just flat on a sequential basis.
In Q1, however, user growth returned. Daily active users across its family of apps -- including Facebook, Instagram, and WhatsApp -- rose to 2.87 billion from 2.82 billion in the previous quarter, and daily active users increased on Facebook itself, from 1.93 billion to 1.96 billion.
That helped calm some nerves that Facebook was losing users to TikTok, as a decline in its user base would surely send the stock spiraling. Meta continues to expand its user base, though almost all of that growth came from the Asia-Pacific and Rest of World regions, which monetize at lower rates than North America and Europe. Still, the user growth should help quell fears that TikTok was killing its business, which seemed to drive the sell-off in February.
2. Management capitalized on the sell-off
Companies don't always use share buybacks effectively and often overpay for their own stock, but the Meta team executed its latest round of buybacks perfectly. The company repurchased $9.4 billion in stock, spending even more than the $8.5 billion it made in free cash flow in the quarter on repurchases. Based on the company's market cap before the earnings, Facebook repurchased about 2% of its shares or 8% on an annualized basis.
That shows the company is taking advantage of the beaten-down stock price as an 8% decline in shares outstanding would lead to a 9% increase in earnings per share, even without an increase in net income.
Share buybacks alone aren't a reason to buy a stock, but Meta remains highly profitable. And while the stock's at a price-to-earnings ratio in the teens, it makes sense to aggressively repurchase it.
3. The company is cutting costs
Meta management is aware that the financial picture has changed considerably in the last few quarters, and it's taking steps accordingly. The company scaled back its expense guidance for the year, now calling for operating expenses of $87 billion to $92 billion compared to a prior forecast of $90 billion to $95 billion.
CEO Mark Zuckerberg said on the earnings call that the company's goal was to fund the reality labs segment with growing profits from its family of apps while also growing the company's overall profits. He acknowledged that it wouldn't happen this year, but the company expects to reaccelerate revenue growth to allow it to. The challenges the company is facing this year likely explain the cut in expense guidance, and Zuckerberg made it clear that the company is being judicious with its spending on reality labs, though it may not seem that way.
Is Meta a buy?
Even with the after-hours gains, Meta stock is trading at a price-to-earnings ratio of 17 based on this year's expected earnings. While the company is facing a number of headwinds, including Apple's ad-tracking transparency initiative, growth should start to accelerate in the second half of the year as it begins to roll off those ad-targeting changes.
Meta's play for the metaverse still remains highly risky, but Zuckerberg has essentially said there's a floor on what the company will spend on reality labs.
Meanwhile, the company's social media properties still dominate the industry, and its advertising remains a cash machine. At the current price tag, Meta looks like a good bet to outperform the market, even if the reality labs division doesn't pay off. On the other hand, if Zuckerberg is right about the metaverse, Meta stock looks like a multi-bagger from here.