Amid the recent tech selloff, shares of Meta Platforms (FB), parent of Facebook have been punished, falling 38% and 45% in the respective three months and six months. The decline includes 10% drop in the past week alone. And when factoring the the sort of aggressive selling that we have witnessed, FB stock as lost more than 50% since reaching its 52-week high of $384.
Is this decline an overreaction? The tech giant will report first quarter fiscal 2022 earnings results after the closing bell Wednesday. Now could be a good opportunity to buy on the dip as FB stock appears significantly undervalued when compared to its large-cap peers. Slowing users and ad growth at its core Facebook and Instagram have spooked the market into questioning Meta’s future. Citing weakness for e-commerce efforts, overall traffic, and advertising spend, last week analysts at Cleveland Research slashed their estimates for the just-ended quarter well below street consensus.
The analysts also referenced market share losses to social media rivals. But aiming to be known for more than just social media (Messenger, Instagram and WhatsApp), CEO Mark Zuckerberg is betting heavily on the metaverse which, according to some estimates, is expected to grow as much as $2 trillion annually. The company’s advances in virtual reality with its Oculus VR headset (Meta Quest) gives it a leg up on the competition.
Until then, Meta’s Reality Labs, which included augmented reality/virtual reality hardware as well as software and content, will need to show it can become the profit center the company is betting on it to be. It’s also worth noting that Meta Platforms still has the highest gross margins among its big tech peers. Nevertheless, on Wednesday, the market will want to know see improvements in the digital ad business which is still the company’s bread-and-butter profit segment.
For the three months that ended March, the Menlo Park, Calif.-based company is expected to earn $2.56 per share on revenue of $28.23 billion. This compares to the year-ago quarter when earnings came to $3.30 per share on revenue of $23.67 billion. For the full year, ending in December, earnings are projected to decline 10% year over year to $12.31 per share, while full-year revenue of $131.58 billion would rise 11.6% year over year.
The projected year-over-year revenue increase of 11.6% would be the company’s slowest growth rate in more than a decade. Since Apple’s (AAPL) iOS privacy changes, which made it more difficult for apps to track user data, Facebook’s advertising business has had to adjust. Analysts, likewise, have since reset Facebook’s expectations with more conservative numbers, which is evident in the Q1 consensus estimate. But it’s no guarantee that even with strong numbers, the stock will react favorably.
In the fourth quarter, Meta delivered $33.67 billion in revenue, up 20%, while operating income was down 1% $12.85 billion. Net income also suffered, falling 8% to $10.28 billion, with EPS coming in at $3.67 per share, down 5%. On the report the stock shed more than 26% and roughly $250 billion of market cap value in a single session after the company warned of a heavy Q1 impact from both Apple’s iOS privacy changes and rising competition.
These two elements are precisely what analysts at Cleveland Research cited as reasons for slashing their estimates below street consensus. To be sure, regarding the iOS impact, Meta has since indicated that it has “made progress rebuilding” its targeting and measurement products. However, these headwinds are likely to persist and impact the company’s ad pricing power until the full pivot to the metaverse arrives.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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