Meta Platforms (META +0.52%) recently reported earnings, and the stock hasn't been jumping on the news, despite achieving a fairly high growth rate. Although the business has been performing relatively well in recent quarters, with its growth rate consistently over 20%, that hasn't been enough to convince investors that it's worth investing in.
There's been one concerning trend that's been emerging recently, as it has been spending more on its long-term growth opportunities, which may be hurting its appeal with growth investors. For a third consecutive quarter, its costs rose at a faster pace than its top line.
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Why rising costs may be a cause for concern
When costs grow faster than the top line, margins shrink, and less of the company's revenue growth flows through to the bottom line. And for a third consecutive quarter, Meta's costs and expenses rose at a faster rate than revenue.
For the first quarter, which ended on March 31, Meta's top line rose by an impressive rate of 33%. However, its costs increased by 35%. In the previous period, costs rose by 40% (versus 24% revenue growth), and in the period prior to that, costs grew by 32% while revenue was up by just 26%.
While Meta's operating margin has remained high at 41% this past quarter, investors may be more concerned about the bigger picture and what its profit growth might look like in the future, with Meta continuing to spend heavily on artificial intelligence (AI). If its growth rate, which was a bit higher than usual this past quarter, dips, then the delta between its rate of expense growth versus revenue growth will widen significantly, and that can have a more pronounced effect on its margins.
NASDAQ: META
Key Data Points
I wouldn't rush to buy the stock
Entering trading this week, Meta's stock was up around 2% over the past 12 months, which is far below the S&P 500's impressive gains of 27% during that stretch. Despite its fairly strong financial results, investors appear to be concerned about Meta's business and long-term growth potential, and I also question how strong its numbers will be if it continues to spend heavily on AI.
The company has been aggressive in the past in spending aggressively to take advantage of new and emerging opportunities, and my concern is that it may once again be going in the same direction, this time with AI. While a fast growth rate may mask that for a while, that may not be the case over the long term. And although the stock may not look terribly expensive today, trading at a forward earnings multiple of just 20 (based on analyst expectations), it's by no means a no-brainer buy; there's plenty of risk with Meta's stock.
