Metaverse-obsessed Mark Zuckerberg refuses to cut costs. It’s no wonder the stock tanked
Club holding Meta Platforms (META) reported mixed third-quarter results and weak forward guidance after the closing bell Wednesday. Wall Street punished the Facebook-parent in after-hours trading, taking the stock down roughly 19%, as a seemingly tone deaf management team led by founder and CEO Mark Zuckerberg refused to listen to their investor-base and throttle back investments in their pursuit of the metaverse. While beating expectations , revenue for Q3 dropped 4% to $27.71 billion. It’s the second quarterly decline in a row, and the company warned of another drop in the current fourth-quarter. Diluted Q3 earnings of $1.64 per share — down 49% year over year — missed the $1.89 estimates. Bottom line Management’s build-the-metaverse-or-die-trying approach to spending is incredibly frustrating. Meta isn’t going to cut spending in the year ahead. They’re not even going to keep it flat. Instead, they’re opting to up the ante and increase total expenses by mid-teen percentage points in 2023. The company expects Reality Labs operating losses next year to “grow significantly year -over- year .” Reality Labs is the metaverse unit that includes augmented and virtual reality related consumer hardware, software and content. Meta Platforms is right to invest in what they believe is the next major computing platform. However, we can’t help but think that right now — given the tough economic climate— is not the time to aggressively pour money into what many would consider a moonshot. Even management has acknowledged that the metaverse won’t payoff, if at all, until multiple year s down the line. By contrast, the underlying fundamentals of the core business actually don’t seem that bad. In fact, they’re actually proving pretty resilient. You listen to the conference call and for the most part, you actually like what you hear. Engagement remains healthy. The number of people using Facebook is as high as it has ever been, with the Family of Apps overall now reaching over 3.7 billion people globally. Even Reels — Meta’s answer to short-form video dominated by TikTok — appears to making good progress and causing users to spend incrementally more time on the platform. Additionally, the team is starting to monetize Messenger and WhatsApp — ideas that used to get investors excited before the metaverse started to dominate the discussion. We think dialing back metaverse investments and putting more money into stock buybacks would make sense, given the company’s roughly $300 billion market value, factoring in the after-hours plunge, and it’s low-teens price-to-earnings multiple, even if you take an axe to profits on this guide. Given the team’s stubbornness when it comes to spending and unwillingness to listen to investors, we have no choice but to downgrade shares to a 2 rating . We also cut our price target to $150 per share from $235. While the stock was below $105 in after hours trading. As much as downgrading the name pains us at these depressed levels and sub-market valuation, the sad reality is that so long as management stays this course, unwilling to temper spending at least in the near-term, upside will be limited and we can’t justify adding additional capital in a down market at this time —especially with significantly more attractive opportunities out there in companies with management teams more in tune with the economic environment. Companywide Q3 results Within the Family of Apps unit — which includes Facebook, Instagram, Messenger, WhatsApp and other services — advertising revenue of $27.24 billion exceeded expectations of $26.86 billion while other services revenue came in at $192 million. That segment accounts for nearly all of the company’s total revenue . Reality Labs, meanwhile, saw sales of $285 million, missing expectations of $419 million. As for profitability, Family of Apps operating income came in at $9.34 billion, short versus expectations of $9.65 billion. Reality Labs reported an operating loss of $3.67 billion, greater than the $3.47 billion loss the Street was anticipating. Meta repurchased $6.5 billion worth of shares during in the quarter and ended with $41.89 billion in cash, cash equivalents and marketable securities on the balance sheet. As of the end of the third quarter, Meta had $17.78 billion remaining under its share repurchase authorization. Quarterly engagement Facebook Daily Active Users (DAUs): 1.98 billion, in line with expectations . Facebook Monthly Active Users (MAUs): 2.96 billion, also roughly in line with expectations . Facebook DAUs/MAUs came in at 67%, marking the third consecutive quarter at that level following six straight quarters at 66%. Facebook Global Average Revenue per User (ARPU): $9.41 versus expectations of $9.83. As for Family of Apps engagement metrics, which more broadly represent engagement across Facebook, Instagram, Messenger, and/or WhatsApp, the results were as follows. Family Daily Active People (DAP): 2.93 billion, up 4% year over year Family Monthly Active People (MAP): 3.71 billion, up a similar 4% year over year Family DAP/MAP came in at 79%, largely in line with the rate we’ve seen over the past two year s Family Global Average Revenue per Person (ARPP): $7.53. Notably, management commented on the release that ad impressions across the Family of Apps were up 17% year over year . However, offsetting that, the average price per ad was down 18% year over year . Reels commentary Engagement trends at Reels were positive with management noting that plays across Facebook and Instagram are up 50% versus six months ago at over 140 billion. The increasing popularity of Reels isn’t completely at the cost of other Meta offerings, with management noting that they believe they are “gaining time spent share on competitors like TikTok.” While the Reels numbers are encouraging in terms of Meta’s ability to compete with TikTok, short-form video still monetizes at a lower level than Feed and Stories — and as a result, the shift of engagement from those mediums to Reels poses a near-term headwind to revenue. Guidance Meta Platforms expects total revenue in the fourth quarter of 2022 ( current quarter ) to be in the range of $30 billion to $32.5 billion, short versus estimates of about $32.36 billion at the midpoint. Meta’s Q4 revenue in 2021 was $33.67 billion. On the expense side, management shaved the high end of full- year expense expectations , now projecting a range of $85 billion to $87 billion, versus the $85 billion to $88 billion range previously forecast. Capital expenditures (capex) guidance was tightened to a range of $32 billion to $33 billion versus $30 billion to $34 billion previously forecast and above the $30.41 billion consensus. Additionally, the 2023 expense guide is not at all what investors were looking for. Instead of flat to down total expenses for next year , management sees that number in the $96 billion to $101 billion range. Capex in 2023 is expected to be in the range of $34 billion to $39 billion, more than the $29.65 billion the Street was looking for with nearly all of the increase versus 2022 levels attributable to investments in the data center and artificial intelligence (AI). The team said they expect the investments in AI to provide a technology advantage and “unlock meaningful improvements across many of [their] key initiatives including feed, Reels, and ads.” (Jim Cramer’s Charitable Trust is long META. See here for a full list of the stocks.) 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