ii view: Meta shares plunge as it battles cocktail of challenges

Shares for this social media mammoth have fallen significantly during 2022, but the Nasdaq company is investing heavily in its future. We assess prospects.

Third-quarter results to 30 September

• Total revenue down 4% to $27.7 billion
• Net income down 52% to $4.39 billion
• Earnings per share down 49% to $1.64
• Cash and cash equivalents of $41.78 billion

Chief Executive Mark Zuckerberg said:

"Our community continues to grow and I'm pleased with the strong engagement we're seeing driven by progress on our discovery engine and products like Reels. While we face near term challenges on revenue, the fundamentals are there for a return to stronger revenue growth. We're approaching 2023 with a focus on prioritisation and efficiency that will help us navigate the current environment and emerge an even stronger company."

ii round-up:

Facebook owner Meta Platforms Inc Class A (NASDAQ:META) forecast disappointing next quarter sales as it posted earnings which fell short of Wall Street forecasts. 

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Meta, whose brands also include both Instagram and WhatsApp, expects fourth quarter revenues of as low as $30 billion compared to analyst forecasts nearer to $32.2 billion. Earnings for the third quarter to the end of September almost halved year-over-year to $1.64 compared to expectations nearer to $1.90 per share. 

The Mark Zuckerberg headed company has been battling a cocktail of challenges including rising costs, customer caution in buying ads in the face of a potential recession, intense competition from TikTok and Apple's (NASDAQ:AAPL) new privacy update. 

Meta shares fell by around a fifth in aftermarket US trading having already fallen by around three-fifths year-to-date coming into this latest news. Shares for rival online ad provider and Google owner Alphabet Inc Class A (NASDAQ:GOOGL) are down by around a third during 2022, while shares for rival social media company Snap Inc Class A (NYSE:SNAP) have fallen by close to four-fifths. 

The 4% fall in third quarter revenue to $27.7 billion marked its second straight quarterly decline. Total costs and expenses rose by almost a fifth year-over-year to $22.05 billion, with staff numbers up by more than a quarter from this this time last year to 87,314 as it continued to offer more scrutiny on social posts. 

Losses for its Reality Labs business, which includes its virtual reality headsets and its metaverse operations, are expected to grow significantly year-over-year as it continues to invest. Group wide capital expenditure over the next two years is expected to come in at around $69 billion as it invests in data centres, servers, network infrastructure and its own Artificial Intelligence (AI) capacity. 

Broker Morgan Stanley downgraded its stance on the shares to ‘equal weight’ from a previous overweight stance following the results. 

ii view:

Founded in 2004, Facebook monthly active users now total 2.96 billion, an increase of 2% year-over-year. In 2021, the US accounted for its biggest slice of sales at around two-fifths, followed by Europe at almost a quarter, Asia Pacific at more than a fifth and the rest of the world the balance. Sales for its Reality Labs VR business generated less than 2% of annual sales. 

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For investors, an 18% drop in the average price per ad year-over-year is compounding its desire to grow revenues. A highly uncertain economic outlook overshadows its customers spending confidence, costs have risen, while government and regulatory concerns regarding Facebooks influence over such events as elections and misinformation have also not disappeared. 

More favourably, initiatives to address costs, including attempting to keep staff numbers flat, are being implemented. Major investment into its offerings including both AI and the virtual world of the metaverse are being made, whilst cash and cash equivalents held of over $40 billion is not to be forgotten. 

On balance, and while major investments in its future offer hope, investors may for now await evidence of earnings recovery before adding to any existing shareholdings.  

Positives

• Monthly active users across its apps of over 3.5 billion
• Cost saving initiatives

Negatives

• A series of scandals have previous hit the company
• Stronger dollar hindering performance

The average rating of stock market analysts:

Buy