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Amid the recent tech selloff, shares of Meta Platforms (META) have been punished, falling 35% and 58% in the respective six months and nine months. Down 61% year to date and 62% over the past year, it would seem the market no longer believes in the company’s growth capabilities.
The Facebook parent has suffered from, among other things, slowing user growth and advertising growth at its core Facebook and Instagram products, both of which have scared investors away. But the company last quarter produced user metrics that weren’t as bad as expected. However, on the heels of another brutal third quarter from Snapchat parent Snap (SNAP) which released Q3 results that fell short of analysts’ expectations, the market is bracing for another tough quarter from Meta’s digital ad business.
For Meta, however, even amid inflationary cost pressures and struggles with daily active users, the company can still beat profit expectations which are low. Heading into the quarter, Meta stock was listed among Citigroup’s top picks in the Internet space. Analysts Ronald Josey said Meta presented a “compelling” risk/reward opportunity at current levels. Josey who has a Buy rating on the stock with a $222 price target price, implying 67% upside, says Q3 expectations are “relatively muted given industry chatter around engagement, social media competition, and monetization.”
In other words, the analyst believes Meta should easily beat the Street estimate. As such, now could be a good opportunity to buy on the dip as Meta stock appears significantly undervalued when compared to its large-cap peers. Without question this will be a pivotal quarter for the company on Wednesday. It goes without saying that the market will certainly want to see improvements in the bread-and-butter digital ad business.
For the three months that ended September, the Menlo Park, Calif.-based company is expected to earn $1.89 per share on revenue of $27.41 billion. This compares to the year-ago quarter when earnings came to $3.22 per share on revenue of $29.01 billion. For the full year, ending in December, earnings are projected to decline 28% year over year to $9.79 per share, while full-year revenue of $117.21 billion would decline 0.6% year over year.
The slight contraction in full-year revenue underscores the challenging digital ad environment the company has navigated under. Rising inflation, which has forced business to reduce ad budgets, is also a concern and could adversely impact the company’s revenue for the just-ended quarter. Beyond these macro headwinds, Meta’s ad business is still recovering from the Apple’s (AAPL) iOS changes that made it more difficult for Meta to utilize ad targeting of consumer behavior, making it more expensive for Meta to produce outcomes for advertisers.
In the second quarter, the company’s digital ad revenue, which accounted for more than 99% of total revenues, declined 1.5% year over year to $28.15 billion. The decline is glaring considering the bet that the CEO Mark Zuckerberg is making on the Metaverse via its Reality Labs initiatives. However, funding for Reality Labs comes from revenues generated from the digital ad business. It’s still a solid bet given that estimates suggests Metaverse can grow as much as $2 trillion annually, but there’s a long way to go from here to there.
Meta’s advances in virtual reality with its Oculus VR headset (Meta Quest) gives it a leg up on the competition. But given the recent struggles in the ad business, the company has opted to slow its investments in certain Reality Labs projects, hoping to revive profits. As such, on Wednesday, beyond the top and bottom line numbers and results from the digital ad business, the management will need to show improvements in its Reality Labs, demonstrating that the business can emerge as Meta’s profit center that it is expected to become.
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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