Amit Kupfer @AmitKup: "Meta's Numbers: Net Income vs...."

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Meta's Numbers: Net Income vs. Free Cash Flow I came across this meme on Twitter and I thought it was worth explaining. Nvidia's success is being fueled by huge spending from companies like Meta, which is consuming a significant portion of Meta's free cash flow. In the world of accounting, things are rarely what they seem, so don't believe every number you see on an income statement. This is a classic example where the reported figures don't tell the whole story. Meta's "true" net income is likely closer to $20 billion, not the $71 billion stated in its books. Before we begin, it's essential to understand the accounting for depreciation and stock-based compensation. I decided to write this post about Meta and Nvidia because they are well-known companies that are easy for investors to understand. However, you can use this adjusted methodology with any company, as long as you understand the business dynamics and can make reasonable assumptions about its future. _ _ _ _ A Simple Way to Think About Depreciation and Capital Expenditures Imagine you buy a new TV for $1,000. While you pay the full amount upfront—this is your 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐞𝐱𝐩𝐞𝐧𝐝𝐢𝐭𝐮𝐫𝐞—you plan to use it for five years. This five-year period is your "useful life" figure. The annual "cost" of using it is $200 ($1,000 / 5 years), which is your 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧. Businesses calculate these investments in the same way. _ _ _ _ Stock-Based Compensation as a Real Expense Stock-Based Compensation (SBC) is a real expense, not just an accounting figure. It represents a genuine cost to shareholders because it dilutes their ownership percentage by increasing the number of outstanding shares. This dilution reduces each share's claim on the company's future earnings and assets, effectively making it a cost to current owners. _ _ _ _ Analyzing Meta's Financials and "Real" Net Income Let's apply this thinking to Meta and Nvidia. Looking at Meta's free cash flow statement, we see that depreciation was $16.7 billion, while capital expenditures were $52 billion. This significant gap is a critical factor that will impact Meta's income statement in the coming years. A higher and growing capital expenditure will inevitably lead to higher depreciation, which in turn will reduce reported net income. However, that is a story for the future; let's focus on the present. A compelling argument can be made that Meta's "adjusted" annual net income is closer to $20 billion, not the $71 billion reported. Here is the calculation, along with where to find each of the stated numbers. To be clear, I'm not trying to be absolutely accurate about Meta's FCF figures, just close enough: - Operating Income: $77.5B (found in the income statement) - Depreciation: +$16.5B (found in the cash flow statement) - Stock-Based Compensation: -$17.5B (found in the cash flow statement) - Capital Expenditures: -$52B (found in the cash flow statement) - Total: =$24.5B - Effective Tax Rate: (Less 15% effective tax rate, found in the earnings call footnotes) - Adjusted *Free Cash Flow: =$20B * excluding interest payments. This figure is approximately 3.4 times lower than the net income stated in Meta's books. Do I think Meta is a bad company? Not at all. Until recently, they ran an incredibly efficient, capital-light business. And the assumption is that the huge AI investments will pay off. It remains to be seen how long it will last, but currently, Nvidia is consuming a significant portion of the free cash flow of many big tech and well known companies. _ _ _ _ What I was trying to convey in this analysis is that to be a fundamental investor, you need to: a. Understand that accounting is the language of business. You must know at least some of the fundamentals. b. Even with this knowledge, you need to understand the business dynamics to make your own assumptions about the stated numbers. c. You should never blindly trust the stated numbers reported by companies and analyzed by others. Thank you for reading. Copy Trading is not investment advice | Capital at risk | Past performance does not guarantee future results.