Meta Shares Plummet: Here’s Why Investors Should Avoid It

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Tim Phillips

October 28, 2022

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Investors in Big Tech stocks this year have been disappointed as large companies across the board have seen their share prices fall, along with the S&P 500 Index.

No doubt a lot of us here in Singapore have exposure to US Big Tech stocks, either directly or indirectly through exchange-traded funds (ETFs).

However, in this current earnings season, and throughout 2022, the one Big Tech company that has stood out is Meta Platforms Inc (NASDAQ: META).

But it’s been for all the wrong reasons. That’s mainly down to the fact that the “Metaverse” is being sold as the future of the company.

Problem is, for shareholders at least, Meta’s Reality Labs division is bleeding cash right now. That, along with a host of other issues, has seen Meta’s share price crater by 71% so far in 2022.

So, what should investors know about Meta’s latest earnings? Here’s a quick breakdown and why I think long-term investors should continue to avoid the shares.

Burning through cash while sales stagnant

In 10 years’ time, Meta CEO Mark Zuckerberg may come out looking like a tech genius for overseeing a successful transition to the Metaverse for his company.

Alternatively, he could also be responsible for torching substantial shareholder value on nothing more than a pipedream.

The reality is, no one knows with any certainty where Meta will end up. However, the numbers in its latest quarter don’t bode well.

Meta saw revenue of US$27.2 billion, down 4% year-on-year (but up 2% in constant currency terms). What spooked investors the most, though – leading to its share price falling 25% yesterday – was its spending plans.

The company had already forecast total expenses for this year to be in the range of US$85-87 billion. For 2023, management said that:

“We anticipate our full-year 2023 total expenses will be in the range of US$96-101 billion.”

That came in way ahead of consensus expectations and, at the midpoint of the range, would be a 15% increase from expenses this year.

Spending plans matter and the extraordinary percentages that expenses are eating up – as a percentage of total sales – is starting to become clear (see below).

Meta expenses Q3 2022

Source: Meta Platforms Q3 2022 earnings presentation

Against that 2023 spending forecast, investors should also remember that Meta posted just shy of US$115 billion in revenue over the whole of 2021.

Margins continue to fall

One of the big things that investors have been focused on this earnings season, regardless of which company is reporting, has been margins.

For Meta, margins look ugly. With increased investment and spending being ramped up – despite an economic slowdown – Meta’s operating margin has progressively deteriorated over the past seven quarters.

Having been as high as 43% in Q2 2021, Meta’s operating margin was just 20% in its latest quarter (see below).

Meta revenue margins Q3 2022

Source: Meta Platforms Q3 2022 earnings presentation

Weak guidance from Meta – another “no-no” for the market right now – also led to concerns mounting that its core ad business is facing severe headwinds.

For Q4 2022, management guided for US$30-32.5 billion in revenue which, at the midpoint, would be a 4% year-on-year drop.

Competition rising in social media

While Meta’s platforms (Facebook, Instagram and WhatsApp) have a phenomenal user base, hitting a combined 2.93 billion users in its latest quarter, there’s still fierce competition.

One area of concern has been short-form video content platform TikTok. The service is now the third-largest social media app (behind Facebook and Instagram).

However, with 656 million monthly active users (MAUs) at the end of 2021, TikTok is still expected to grow its user base to 755 million users by the end of this year.

The main problem for Meta is that TikTok is almost ubiquitous among teenagers in the US. A recent Pew Research Center report highlighted that 67% of TikTok users between the ages of 13-18 use the app daily.

It has become the second-most popular app with young people in the US, behind only YouTube. Meanwhile, Instagram is used by only 60% of teens while Facebook is well behind at 32%.

In addition, Apple Inc’s (NASDAQ: AAPL) decision to turn off IFDA in its iPhones’ settings effectively cost Meta US$10 billion as many users decided they didn’t want to be tracked.

Ramping up spending into a likely recession

Overall, Meta’s problems stem from the fact that its core ad business – which makes up 98% of its revenue – is facing a structural slowdown just as CEO Mark Zuckerberg is deciding the future of the company lies in the Metaverse.

In this environment, controlling costs are key. Unfortunately for shareholders, there doesn’t seem to be any restraint on the part of management.

Just before Meta released earnings, Altimeter Capital – a shareholder in Meta – wrote an open letter to Meta’s board urging it to rein in costs and cut headcount.

Altimeter CEO Brad Gerstner wrote that:

“Meta is investing more in capex than Apple, Tesla, Twitter, Snap and Uber combined”.

He also noted that Meta’s headcount has more than tripled over the past four years to 87,000, from just 25,000 in 2018.

Avoid Meta stock as freefall could continue

While there may be Meta “bulls” out there right now, they are few and far between. The company faces multiple existential crises, with management staking the future of the company on a concept only.

Not only that, the company’s core advertising business is facing a severe slowdown as economic growth slows and competition start to take time share away from Meta’s platforms.

For long-term investors, until there’s a re-think of the company’s “spend at all costs” strategy or financial conditions start to improve, buying Meta shares will continue to be shunned by the market.

 

Disclaimer: ProsperUs Head of Content & Investment Lead doesn’t own shares of any companies mentioned.

About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer. In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.