Meta Platforms Q3 2022 – No fishing here

Ms Sandberg is already badly missed.

• The results were bad but engagement with its services has remained steady which is the one saving grace for a company where its investments look set to eat through even more of its profits in 2023 than they have in 2022.
• The prospect of falling earnings as the company continues to invest with seeming abandon is what sent the shares down 20% in after-hours trading.
• Q3 2022 revenues / EPS were $27.7bn / $1.64 which was broadly in line with estimates, but it was the guidance that soured sentiment.
• Here, the company expects $30.0bn – $32.5bn in revenues in Q4 2022 compared to expectations of $32.2bn.
• However, the real problem is 2023 where despite all of the headwinds and discussion of prudence, expenses are expected to rise to $98.5bn from $86.0bn in 2022, up 14.5% YoY.
• This means that if revenues decline as a result of the macroeconomic climate and increasing competition from TikTok, then EPS could fall by as much as 20% next year.
• Mark Zuckerberg remains in full control of Meta Platforms meaning that if investors don’t like his plans, the only vote they have is with their feet.
• 2022 has seen this come to pass and while I remain concerned with the immediate-term outlook and Mr Zuckerberg’s unwillingness to slow investments to preserve profitability, the shares are now firmly in value territory on 2022’s numbers.
• EPS in 2022 is likely to be somewhere around $9.00 per share which puts the company on 11.7x 2022 PER while EV / Revenue is close to 2.0x 2022 revenues.
• The only piece of good news is that engagement with its services has remained steady.
• DaU are up 4% YoY to 2.93bn for all of its apps while Facebook DaU are holding steady at 2.0bn up 3% YoY.
• ARPU is down 6% YoY but Meta has put this down to new services like Reels growing very quickly but where monetisation has yet to be properly figured out.
• The story is the same for messaging where engagement is good, but monetisation is more challenging.
• Hence, if one believes that Meta can figure out the monetisation of Reels and messaging, then one could forecast that revenues will stabilise and grow in line with peers like Google in 2023.
• This is where I miss Ms Sandberg (who I have long nicknamed the cash register) who spent years turning Mr Zuckerberg’s ideas into a cash generation powerhouse.
• With the cash register in retirement, I have less confidence that the same feat will be repeated which is now badly needed if one wants to make the case to bottom fish Meta Platforms.
• Slides 5 and 9 in the Q3 earnings presentation (see here) encapsulate the problem perfectly where expenses as a percentage of revenues and capex are ballooning even as revenues soften.
• With Mr Zuckerberg investing in AI, new apps and the Metaverse and no one able to stop him, it looks like EPS will decline again next year.
• Flat revenues of $116bn and expenses of $98.5bn give EBIT of $17.5bn which after-tax gives net income of $14bn or $5.21 per share.
• This puts the company on a 2023 PER of 20.1x which, in this market, is not a bargain by any stretch of the imagination.
• Consequently, I am far from convinced that the bottom is in, and I am keeping my fishing rod in the cupboard for now.