⚡ Meta Platforms before earnings report. Will Zuckerberg' company beat Wall Street expectations?

Today after the US trading session, Meta Platforms (META.US) will report results for Q4 2022 and the full year 2022, while opening the Silicon Valley giants' earnings season.  Analysts assume the company will post its third consecutive quarterly sales decline, and Q1 2023 will be weak. Will Mark Zuckerberg manage to improve sentiment on Wall Street?

Revenues: $31.5 billion vs. $27.71 billion in Q3 and $33.67 billion in Q4 2021

Earnings per share: $2.26 vs. $1.64 in Q3 and $3.64 in Q4 2021

Active users (monthly): 2.98 trillion forecast vs. 2.96 trillion in Q3 2022

A slowdown in the advertising market in 2022 has become a reality and has hit Meta's business model, however, in view of global 'disinflation' and (so far) lower chances of a deep recession, bulls expect the company to issue more optimistic forecasts for Q1 and all of 2023.A warning sign for Meta's performance, however, could be the surprisingly weak results of Snap (SNAP.US), after which the digital advertising company lost nearly 15% today before the open. Investors are hoping that Meta will begin to manage costs more sensibly especially with its Reality Labs division, whose work has so far resulted in multi-billion dollar losses for the company. 

Four of Meta's last five report releases have yielded disappointing earnings per share (EPS). Source: Benzinga

Advertising problems

• According to Refinitiv, advertising companies will only see revenue growth in the second half of the year, while Meta is expected to post its steepest revenue decline ever. Revenues are expected to fall another 2.8% in Q1 2023 as the shaky economy puts a strain on advertising budgets;
• A Cowen Fund survey indicated that ad spending in 2023 will grow 3.3% (the lowest estimated growth in five years, with a 7.5% increase in 2022), with two-thirds of ad buyers factoring the recession into their budgets and expecting weaker consumers. This shows that Meta's valuation could be burdened even if a deep recession does not materialize;
• Since Apple enabled ad personalization blocking, Meta has been improving its own ad technology with AI. Some retailers have indicated that they have moved their data to Meta, which has benefited their business. Opportunities to improve ad revenue have also been identified by Insider Intelligence analysts;
• The powerful reach makes Meta likely to gain if the economy improves although TikTok is growing much faster. Cowen analysts expect the Chinese platform to attract 8% of the market's advertising budgets in 2024 versus 6% in 2023, and will remain a major share gainer in the digital advertising sector limiting Meta's potential. 

Costs down, money on the table

• In Q3, revenues fell 4% y/y, while expenses rose 19% y/y. This combination does not bode well all the more so if it persists for much longer. However, if Mark Zuckerberg provides evidence that the company's revenue decline is over in 2022, and spending really gets under control sentiment could improve;
• The company laid off 11,000 employees in Q3 2022, but a recent interview with Zuckerberg indicated that there could be another wave of layoffs in 2023. According to the CEO, too many managers are hampering business operations. The need for further cost reductions was also emphasized on CommandLine by Meta's head of product, Chris Cox. It seems that the company will be willing to further cut expenses in all areas of its business, except Reality Labs.

Metaverse ... Trojan horse or a rescue?

• The declaration of lower spending on Metaverse seems to be unlikely. Zuckerberg has declared in the past that these will only increase. The company sees the concept as an opportunity to create a technology product that would provide it with a powerful user base and an entirely new revenue stream giving it room to scale operations;
• The company is still dependent on competitors like Apple or Google. For example iOS hitting ad personalization (ATT) caused Meta's estimated 2022 losses approx. $10 billion;
• Creating its own technology space would have freed Meta from constraints and driven demand for its own VR / AR products like Oculus, Quest or gaming platforms like Horizon Worlds. However, the company chose a difficult time to pursue the concept. The prospect of rising expenses with negative revenue from Reality Labs made Meta's stock risky.

Meta Platforms (META.US) shares, D1 interval. The price has reached key resistance at $152 per share (SMA200). Meta's results could affect the stock price of other companies in the advertising market, including Alphabet (GOOGL.US) and Snap (SNAP.US). The earnings forecasts are more likely to fall within the lower range of Meta's estimates (30 to 35 billion in revenue) issued after the Q3 2022 report. Source: xStation5