The Meta Pivot Without Saying Pivot

Estimated read time: 4 minutes and 33 seconds

In this week’s newsletter:

1. Meta (re)verse - Outlook and Earnings Review

Meta reported earnings this past week and beat expectations for Q1

Additionally, they guided their Q2’23 revenue estimates higher, which along with beating the streets expectations for Q1’23, helped fuel a rally

Here are some of the numbers behind Meta’s Q1’23

• Earnings: $2.20 per share vs. $2.03 per share expected by analysts, according to Refinitiv

• Revenue: $28.65 billion vs. $27.65 billion expected by analysts, according to Refinitiv.

• Daily Active Users (DAUs): 2.04 billion vs. 2.01 billion expected, according to StreetAccount.

• Monthly Active Users (MAUs): 2.99 billion vs 2.99 billion expected, according to StreetAccount.

• Average Revenue per User (ARPU): $9.62 vs. $9.30 expected, according to StreetAccount.

Meta's Q1 '23 quarter saw a total revenue of $28.65 billion, a 3% increase compared to the same quarter in 2022. Advertising revenue was the main driver of this increase, with ad impressions delivered across their Family of Apps increasing by 26% year-over-year.

However, the average price per ad decreased by 17% year-over-year, partially due to limitations on ad targeting and measurement tools arising from changes to iOS and the regulatory environment. Net income for the quarter was $5.71 billion, with earnings per share of $2.20.

The company's Reality Labs Revenue (Metaverse) segment generated $339 million in revenue for the quarter, a 51% decrease compared to the same quarter in 2022 AND had a loss almost $4 billion with B. 

Meta's advertising revenue for the first quarter of 2022 was $27 billion, which is a 6% increase year-over-year. The company experienced solid growth in APAC and Rest of World, but a more challenging environment in North America and Europe.

Despite the headwinds, Meta saw meaningful growth in areas like video ads and Click-to-Messaging ads. In the second quarter of 2022, Meta experienced a reduction in advertising demand, which they believe was driven by reduced marketer spending due to a more challenging macroeconomic environment.

The appreciation of the U.S. dollar relative to other foreign currencies also had a negative impact on their advertising revenue. Additionally, Meta's advertising revenue continues to be adversely affected by reduced marketer spending as a result of limitations on their ad targeting and measurement tools arising from changes to the iOS operating system beginning in 2021.

In terms of revenue segments, advertising revenue accounted for 97.46% of Meta's annual revenue in 2022 and 98.10% of their quarterly revenue in Q1 2023.

Zuck has made some smart moves in bringing down employee headcount as their advertising revenues took a hit from the Apple iOS changes and while Zuck has stated that he still believes the Metaverse is the future, it looks like Meta is pivoting based on some of their capital expenditures away from betting as big on the Metaverse

Meta said that investments/capital expenditures will remain in the range of $30 billion to 33 billion. That figure accounts for its increased artificial intelligence investments and its ad-supported products like the newsfeed and Reels

To me, this means they are seeing the power and speed of AI and looking to make sure they aren’t falling behind to the likes of Google and Microsoft. They also know the power of their advertising platform and that continuing to improve this segment which generates 98% of their revenues is the smart longterm play

With Metaverse revenues down 51% and losing almost $4 billion, the Metaverse either looks like a pipe dream or a more longer term play that will reap returns multiple years out

AI is evolving and happening here and now it looks like Zuck knows it’s impact and needing to not fall behind

Stohks

When it comes to the macro environment, tech names often perform poorly during slowing GDP (GDP in Q1 did indeed slow and is expected to slow more in Q2) and inflation slowing

However - there are certain catalysts that can make a stock like Meta outperform it’s peers, such as beating earnings expectations and guiding next quarters earnings expectations higher

Beating earnings is a catalyst that can make the stock jump, but even Meta noted in their earnings release that the macroenvironment / GDP slowing will impact their share price

When the macro environment gets tough, the better management teams stand out

How they cut expenses, allocate capital, drive revenues, etc

This is why Meta beating expectations doesn’t mean the same fate for Google or Tesla

Ultimately, as GDP slows even more in Q2, I would expect the tech sector as a whole with tickers like XLK to feel pain

This doesn’t mean individual stocks like Meta that are inside the basket of XLK won’t outperform their peers

It simply means tech as a whole if you look at the past doesn’t perform well during multiple quarters of slowing GDP

Management can do all they can, but ultimately GDP rules the land and you can’t hide from more jobless claims, less consuming spending, less company spending, less profit, and less cash

I don’t see enough positive catalysts for tech stocks over the coming months and think the environment will be difficult for them to thrive

While it's great if you own Meta and rode the earnings catalyst, I think the fun may be short lived and gravity of GDP decline may soon take its turn at the podium

As a longer term investor Zuck continues to prove he can drive growth and is the man for the job

I do believe that weakness from GDP slowdown in Meta will allow for buying opportunities for longer term investors as I believe Meta will make serious strides in AI and it’s ability to boost their advertising platform

- Dev