Meta Platforms Q4 21 – The SNAP Strategy

A further derating is on the cards.

• Meta reported good Q4 21 results but a flatlining of subscriber numbers raised fears that users are at last beginning to vote with their feet triggering a panicked rush for the exit sending the shares down 22.8% in after-hours trading.
• This hammering spread through the technology industry with SNAP falling 10% and even Qualcomm seeing weakness despite a very good set of numbers and a positive outlook.
• Q4 21 revenues / EPS were $33.6bn / $3.67 slightly adrift of estimates of $33.4bn / $3.84 but it was subscriber numbers and the outlook which caused the panic.
• Here subscriber numbers have flatlined at 1.93bn DaU after years of steady growth as competition from TikTok is eating away at time being spent on Facebook’s family of apps.
• Meta has created an alternative called Reels and engagement there is growing quickly, but because Reels does not yet monetise as effectively as other Meta apps, the revenue outlook has been impacted.
• This has become a standard Meta Platforms strategy and has been very effectively used to counter the competitive threat of SNAP on at least two occasions.
• Time will tell whether Meta is too late to counter the juggernaut that TikTok has become, and Reels has certainly come later than its efforts to deal with SNAP’s innovations in the past.
• Apple’s “ask app not to track” feature is also making it harder for advertisers to both target their advertisements and also to see how effective they have been.
• This is why Q1 22 revenue guidance missed expectations with $27bn – $29bn expected well below forecasts of $30.3bn.
• Meta is also already making good on its promise to spend $10bn a year on the Metaverse as Reality Labs lost $3.3bn despite having revenues of $877m.
• These revenues will have been almost entirely hardware shipments of the Oculus Quest 2 where it is clear that the company shipped well over 1m units in Q4 21.
• This is echoed by the Oculus App which climbed to No. 1 on the Apple App Store chart over Christmas making it one of the top gifts given this year.
• There is no doubt that Meta is losing a significant amount of money on every Quest 2 sale, but in return, it has the only thriving VR ecosystem where developers are making money.
• This ecosystem is already well over 3-4m in size and could easily be over 10m by the end of this year.
• This means that Oculus is the place where developers will go first when they write their games because this is where they earn the biggest return on their investment.
• This is why I think that Meta has a big lead in the race to the Metaverse which if it executes properly gives it an opportunity to become a dominant force.
• By comparison, the other contenders are miles behind but that does not mean that Meta will be the ultimate winner.
• Unfortunately, Meta is being given no credit at all for this early success but instead, all of the focus is being placed (correctly) on the travails of the core business.
• What we are now likely to witness is a further derating of Meta’s short and medium-term earnings in terms of its PER multiple.
• Sentiment will also sour further and I suspect that there is going to be a period of sustained pressure as the trend followers reduce or exit their positions.
• This will push Meta closer to Alibaba territory in terms of valuation meaning that if it can fix the problem, then one will be able to have a growth business at a very reasonable price with the leading Metaverse ecosystem thrown in for free.
• Meta Platforms has suddenly got a lot more interesting but there will be a better time to buy it.