Meta Platforms (META +0.69%) stock tumbled 9.1% through 11:45 a.m. ET Thursday despite beating its Q1 earnings report last night. Heading into the report, analysts forecast Meta to earn $6.65 per share on sales of $55.5 billion. In fact, Meta earned $10.44 per share on sales of $56.3 billion.
So what's wrong with that?
Image source: Getty Images.
Meta Q1 earnings
At first glance, very little went wrong for Meta in Q1. Sales surged 33% year over year, net earnings grew 61%, and earnings per share did even better, up 62%.
Much of Meta's earnings growth came not from the business, but from a $5 billion tax benefit added to earnings. That's not a windfall investors can count on repeating often. Meta's operating earnings actually grew slower than sales; operating profit was up only 30%, "thanks" to Meta's expenses rising faster than sales.
NASDAQ: META
Key Data Points
Meta's big AI problem
So here's the problem: CEO Mark Zuckerberg, who just a few years ago renamed his company and set out to build a "metaverse," is now betting even more heavily on artificial intelligence. Promising to "deliver personal superintelligence to billions of people," Meta took $19 billion of the $32.2 billion in cash it generated from operations in Q1, and plowed it into capital spending to grow the AI business -- leaving Meta with only $13.2 billion in free cash flow.
That's less than half the $26.8 billion Meta says it "earned" in Q1, which tells me AI spending is eroding Meta's quality of earnings. In a situation like this, investors are best advised to focus on Meta's price-to-free cash flow ratio rather than its P/E when evaluating the stock.
At 35 times trailing free cash flow, the Meta stock is certainly not cheap.
