Deep Dive: Facebook is one of only four companies in the S&P 500 to make this remarkable achievement over the past 10 years — and its stock is already cheap

Below is a comparison of financial performance for Meta Platforms Inc.
FB,
-26.39%
— Facebook’s holding company — and three other companies in the S&P 500
SPX,
-2.44%.
It is a special group, and Meta’s stock is, by far, the cheapest of the bunch.

Shares of Meta Platforms were down as much as 27% on Feb. 3 after the company reported a decline in fourth-quarter profit from a year earlier. Sales rose 20%.

Meta also disappointed investors by predicting its first-quarter sales would range from $27 billion to $29 billion, when analysts had been predicting $30.2 billion. The company’s advertising business is in transition, in part, because of changes in privacy settings for users of Apple Inc.’s
AAPL,
-1.67%
iPhones.

Read: Facebook stands to shed more than $200 billion in market value after rough earnings report

We’re not even halfway through the first quarter, so let’s focus for a moment on what Meta reported for the fourth quarter. Sales came in at $33.67 billion and were up 19.9% from $28.07 billion in the fourth quarter of 2020. That’s impressive revenue growth. But how does it measure up?

It turns out that if we look back 10 years — 40 quarters — Meta’s (or Facebook’s) minimum year-over-year increase in quarterly sales has been 10.7%.

That is remarkably consistent performance. Among the S&P 500
SPX,
-2.44%,
only three other companies have achieved double-digit year-over-year sales growth every reported quarter over the past 10 years. Here they are, sorted by minimum sales growth for that period:

Meta is on the bottom of this tiny list with the lowest minimum sales increase, but it has had the highest mean and median year-over-year increases in quarterly sales among the S&P 500 over the past 40 reported quarters. The mean is what most people call the “average,” or the sum of the numbers divided by the number of periods. The median is the quarterly sales increase in the middle of the group of 40.

Before digging into profit margins, check out the forward price-to-earnings ratios for the four companies as of the close on Feb. 2 — before Meta’s shares took a dive:

Meta has, by far, the lowest forward P/E. And it compares to a forward P/E of 20.4 for the S&P 500, which is expected to increase sales by only 7.7% this year, based on weighted aggregate estimates among analysts polled by FactSet.

Profit margins

Investors were obviously upset that Meta’s net income for the fourth quarter of 2021 was down 8% from a year earlier. (Earnings per share were down 5%.) But a look at three profit margins sheds a bit more light on what has been going on:

Net income margin

Meta’s net income margin (net income divided by sales) for the fourth quarter was 30.55%. That was down from 39.97% a year earlier. But it compared more favorably to 31.69% in the third quarter of 2021. The net income margin has been significantly lower before — during the first two quarters of 2020, which was understandable for the early stages of the coronavirus pandemic, but also during all four quarters of 2015. That said, earnings and net interest margins may be relatively low at Meta for a long period, as the company’s expenses have risen across the board.

Fourth-quarter expenses (excluding taxes) were up 38% from a year earlier. Meta CFO David Wehner said during the earnings call on Feb. 2 that higher expenses were “driven primarily by Reality Labs hardware costs, core infrastructure investments and payments to partners.” Reality Labs is Meta’s virtual reality unit, which includes Oculus VR equipment and is a critical component of CEO Mark Zuckerberg’s long-term “metaverse” strategy.

Read: Meta CFO cries ‘wolf’ again with bleak Facebook outlook — but he may be right this time

Taxes were up considerably, with an income-tax rate of 19%. Wehner said the income tax rate for all of 2022 was expected to be “similar” to the 17% in 2021, which was up from 12% in 2020. That’s painful. Then again, the fourth-quarter income-tax provision of $2.42 billion was 7.2% of sales, up from 6.5% a year earlier. The higher tax rate might turn out to be a relatively small item, when compared with Meta’s increased “metaverse” development spending.

This table shows the past five reported quarters’ net income margins. The columns are marked “Q” for the most recent quarter, then “Q-1” for the previous one and so on, because the most recent quarter-end for Meta was Dec. 31, while the most recent quarter ends were Sept. 30 for Amazon.com Inc.
AMZN,
-7.81%
and Fortinet Inc.
FTNT,
-4.16%,
and Oct. 31 for Salesforce.com Inc.
CRM,
-5.39%.

One can argue that net income margin isn’t very important, in light of Amazon’s multi-decade success even though it reported net losses or relatively small profits consistently for years as it focused on expansion. But Meta has been consistent with the highest net margin among these four companies over the past year.

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Operating margin

A company’s operating margin is, essentially, earnings before interest, taxes, depreciation and amortization (EBITDA) divided by sales. So it factors in the variable costs of production and sales, while leaving out capital expenditures and taxes.

Here’s a comparison of operating margins for the four companies over the past five quarters.  The columns are marked “Q” for the most recent quarter, then “Q-1” for the previous one and so on, because the dates for the most recently available quarters don’t match, as explained before the net income margin table, above.

It is no surprise that Meta’s operating margin was down from a year earlier, but it was still much higher than those of the other three companies.

Gross margin

A company’s gross margin is its net revenue minus the cost of goods or services sold. It reflects a company’s pricing power and its direct production costs, including labor and materials. A company’s management team might decide to build market share by increasing discounts to customers or holding the line on price increases. This may be worthwhile depending on the competitive environment, but it cannot go on forever. It’s a good sign if the gross margin is expanding as sales increase.

Here’s a comparison of gross margins for the four companies over the past five quarters.  The columns are marked “Q” for the most recent quarter, then “Q-1” for the previous one and so on, because the dates for the most recently available quarters don’t match, as explained before the net income margin table, above.

Once again, Meta shines, although the gap with the other companies narrows. Meta’s fourth-quarter gross margin narrowed moderately from a year earlier, but it leads the group by this profit measure.

Meta Platforms is going through what analysts call a “re-rating.” The company’s earnings estimates for 2022 and beyond will decline over the next several days. It’s price drop on Feb. 3, combined with the decline in earnings estimates, might not lead to a significant decline in the stock’s forward P/E, but all the above figures argue that Meta was already an inexpensive stock.

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