Meta Platforms Q3 Earnings: Disaster, But There Is Still Upside Potential (NASDAQ:META) - Seeking Alpha

Chip Somodevilla

Meta Platforms (NASDAQ:META) formerly known arsenic Facebook has precocious announced results for a pugnacious 3rd 4th of 2022. The institution bushed gross estimates but net missed expectations owed to a immense summation successful expenses related to Metaverse investments and hiring. Meta's banal terms has been butchered and is down by ~20% successful pre-market trading; this compounds connected apical of the 65% diminution successful terms the banal has had since September 2021. Its banal terms is presently trading astatine a akin terms to backmost successful 2015, contempt gross expanding by 10X implicit the play from $17.9 cardinal to $117.9 billion. Therefore I judge that contempt the fearful commentary, Meta whitethorn not beryllium arsenic successful arsenic atrocious of a presumption arsenic mainstream quality would similar you to believe. The institution is investing for the aboriginal and the banal is profoundly undervalued intrinsically (even without the Metaverse). Thus successful this post, I'm going to interruption down the 3rd 4th results successful granular detail, uncover the level trends, Metaverse investments and of course, a valuation, let's dive in.

Data by YCharts

Third Quarter Breakdown

Meta generated mixed fiscal results for the 3rd 4th of 2022. Revenue was $27.71 cardinal which declined by 4% twelvemonth implicit year. This whitethorn look similar a catastrophe astatine archetypal glance, but gross inactive bushed expert statement estimates by $313.8 million. Its planetary gross was besides impacted by a beardown U.S dollar. Therefore connected a changeless currency basis, gross would beryllium up 2% twelvemonth implicit twelvemonth oregon an other $1.79 billion. In addition, we should support successful caput that Meta experienced immense maturation implicit the lockdown play arsenic gross jumped by implicit 35% betwixt Q3 2020 and Q3 2021, truthful the examination is unfavorable.

Meta Revenue by Geography (Q3 Earnings)

Meta Platforms makes the bulk of its gross from advertizing to its users. Therefore idiosyncratic attraction and engagement are captious metrics to analyze. In this lawsuit its "Family of Apps" which includes Instagram, Facebook and WhatsApp had 3.71 cardinal monthly progressive radical successful Q3,22 which accrued by 4% twelvemonth implicit year. This was slower than the ~11% maturation complaint achieved betwixt Q3,20 and Q3,21 which represented the lockdown play of growth. Instagram had "more than" 2 cardinal monthly progressive users and WhatsApp had implicit 2 cardinal regular progressive users successful Q3,22 which are some grounds figures. As of the extremity of 2021 (latest figures public), rival TikTok had astir 1.2 monthly progressive users, frankincense Instagram looks to beryllium firmly retired successful front. In addition, I forecast Instagram users to beryllium much "sticky" arsenic it's a precise idiosyncratic level wherever radical upload regular idiosyncratic photos of friends, partners, and family. TikTok is categorized by much users than axenic creators and is little idiosyncratic and much entertaining by nature.

Family Monthly Active People (Q3,22)

Meta's flagship level Facebook had monthly progressive users [MAUs] of 2.96 billion, which accrued by 2% twelvemonth implicit year. This was not immense growth, but astatine slightest users weren't declining arsenic we saw betwixt Q1,22 and Q2,22.

Facebook Monthly Active Users (Q3,22)

Social Media Trends & Investments

Zuckerberg admitted successful the 3rd 4th net telephone that "some apps whitethorn beryllium saturated successful immoderate countries oregon immoderate demographics". But helium did item coagulated engagement maturation successful formats specified arsenic Reels, which is Facebook's equivalent of TikTok's.

In an October 2022 Interview, Zuckerberg admitted that helium had "missed" the displacement successful however radical observe content. Previously Facebook and Instagram were focused heavy connected showing contented from friends that you followed. However, present Zuckerberg believes that it is "less important who produces the contented that your finding, you conscionable privation the champion content".

Therefore to assistance leverage this trend, Meta is investing successful improving its "AI find engine" which volition helps urge much contented crossed the Meta web arsenic opposed to conscionable from accounts that you follow. Video Reels are a large portion of this and person implicit 140 cardinal plays each day, which is up 50% from 6 months ago. Zuckerberg believes Meta is "gaining" connected competitors specified arsenic TikTok. The main unsocial selling points of the Facebook and Instagram platforms look to beryllium the premix of contented types which includes Photos, text, short-form and long-form videos etc. Whereas TikTok is simply a pure video "Reels" platform. Meta besides has implicit 1 cardinal Reels shared each time done DMs, whereas TikTok doesn't person this nonstop messaging feature. Facebook and Meta adverts are besides large for Localization Marketing, arsenic they connection much granular power of city-based targeting. For example, erstwhile I tested TikTok adverts I noticed that they had large metropolis targeting but not smaller cities. Whereas connected Facebook ads you tin virtually driblet a pin connected the representation and people circumstantial locations.

The Monetization of Reels has been a cardinal contented Meta has struggled with, arsenic has Google (GOOG) (GOOGL) with its "YouTube Shorts". As Reels turn successful popularity they are presently displacing gross from higher revenue-generating in-app existent estate. Meta believes its champion to fto the Reels level turn despite taking a $500 cardinal quarterly gross headwind, which is substantial. You tin spot this antagonistic inclination via the Family Average Revenue Per Person (ARPP) metric graph below. ARPP was $7.53 successful the 3rd 4th of 2022, which was down ~8% twelvemonth implicit twelvemonth owed to the aforementioned Reel monetization issues.

The bully quality is Meta believes that wrong 12 to 18 months, it should person improved its monetization rate. Instagram Reels unsocial crossed a $1 cardinal yearly gross tally complaint past 4th and frankincense the accidental is immense. Overall advertisement impressions crossed its Family of Apps person accrued by 17% twelvemonth implicit twelvemonth which is positive.

Family Average Revenue Per Person (Meta Q3,22)

Meta is besides investing successful "messaging" arsenic historically its fashionable chat level WhatsApp has not been utilized afloat from a monetization standpoint. Meta has begun to instrumentality "click to message" ads which enables customers to connection businesses straight from Facebook adverts via Messenger oregon WhatsApp. This is 1 of the company's fastest-growing ads products and present arsenic a staggering $9 cardinal yearly tally rate. Meta is besides leveraging its paid messaging features done partnerships with platforms specified arsenic Salesforce (CRM) which enables customers to straight link done the messaging service. Meta besides launched JioMart connected WhatsApp successful India which offers an end-to-end buying experience.

Metaverse Investments

Mark Zuckerberg has a bold imaginativeness to physique retired the "Metaverse", a caller computing level that aims to link radical with Virtual Reality and Augmented Reality technology. Meta announced a bid of prototype technologies astatine its Connect event, these included a state-of-the-art AR controller and an unthinkable photo-realistic Avatar. In the representation below, I person created from lawsuit screenshots you tin spot that some images connected the near and close are of an avatar, not the existent Zuckerberg.

Metaverse Photo Realistic Avatar Mark Zuckerberg (created by writer Ben astatine Motivation 2 Invest (Connect))

Despite the excitement surrounding the Metaverse, the exertion is inactive successful its aboriginal stages. Hedge Fund capitalist Brad called connected Meta to put "no much than $5 billion" into the Metaverse annually which is overmuch little than the $10 billion+ per twelvemonth which Meta is presently investing. The estimated payback for these investments is implicit 10 years and frankincense successful the meantime, the halfway concern could decline. Capex Expenditures twelvemonth to day are $22.8 billion, with $9.5 cardinal of these expenses coming successful the 3rd 4th of 2022. This large boost has been driven by investments successful gathering retired AI infrastructure. Capex is forecasted to proceed to stay precocious successful 2023, arsenic the caller Quest Virtual Reality headset launches and the effects of caller worker hires (up 28% twelvemonth implicit year) are felt. Meta's absorption does expect these expenses to travel down arsenic a percent of gross successful the agelong term.

Capex Meta (Q3,22)

Meta has bold plans to crook its Quest Pro Virtual Reality headset into a workplace productivity tool. The institution has scored partnerships with rival Microsoft (MSFT) to alteration teams connected Quest. In addition, it has announced integrations with Adobe and Autodesk the plan bundle packages. As a erstwhile plan engineer, I bash spot the payment of utilizing a quest for designers and engineers to enactment unneurotic connected a communal model, for illustration successful the aviation, automotive oregon buildings industry. The exertion has been pitched to engineering firms for galore years and I personally developed an Augmented Reality strategy backmost successful 2015 for a manufacturing company. For mainstream meetings/business, I spot Microsoft arsenic a much earthy spouse arsenic they are gathering retired their ain Metaverse platform.

Overall Profitability Review

The institution generated $22.05 cardinal successful wide costs and expenses successful Q3,22 which has accrued by an eye-watering 19% twelvemonth implicit year. This did see a $413 cardinal impairment nonaccomplishment related to operating leases arsenic the concern streamlines its bureau abstraction to cater for a hybrid workforce. Net Income was $4.4 cardinal successful Q3,22 and is intelligibly connected a downward trend. This has been driven by a operation of aforementioned factors which includes, dense investments, Reel monetization issues and the macroeconomic situation which has caused advertisers to curb advertisement spending.

Meta Net Income (Q3,22)

Earnings Per stock showed a akin inclination arsenic it declined to conscionable $1.64 which missed expert expectations by $0.22, owed to the aforementioned issues.

Earnings per stock (Q3,22)

Robust Balance Sheet

The bully quality is Meta has a coagulated equilibrium expanse with ~$41.78 cardinal successful cash, currency equivalents and short-term investments. In summation to $9.92 cardinal successful semipermanent debt. Meta bought backmost a staggering $6.55 cardinal successful banal and has a further $17.78 cardinal disposable for stock bargain backs.

Advanced Valuation

In bid to worth Meta, I person plugged the latest financials into my precocious valuation exemplary which uses the discounted currency travel method of valuation. I person forecasted a minus 10% maturation complaint for adjacent twelvemonth based connected guidance by management, driven by an expected 7% FX headwind and little spending by advertisers owed to macroeconomic issues. In addition, I person forecasted 10% maturation per twelvemonth successful years 2 to 5. I expect this to beryllium driven by a instrumentality connected Meta's investments successful Reel Monetization and a rebound successful the cyclical advertizing market. This takes into relationship dependable maturation successful Oculus but not immense metaverse growth, arsenic that would beryllium expected to beryllium realized successful years 8 to 10, and is uncertain.

Meta banal valuation 1 (created by writer Ben astatine Motivation 2 Invest)

To summation the accuracy of the valuation, I person capitalized the company's R&D expenses. This has boosted operating income and frankincense its operating borderline to 35.43% which is highly steadfast fixed the mean borderline for the bundle manufacture is 23%. I person besides forecasted a flimsy betterment successful its operating borderline implicit the adjacent 8 years, fixed the Reel monetization improvements.

Meta banal valuation 2 (created by writer Ben astatine Motivation 2 Invest)

Given these factors I get a just worth of $228.2 per share, the banal is trading astatine $104 per stock astatine the clip of penning and frankincense is ~54% undervalued. This means that contempt the antagonistic headlines determination is simply a important upside for Meta stock.

As an other datapoint, Meta trades astatine a Price to Earnings ratio = 13.31 which is 46% cheaper than its 5-year average.

Data by YCharts

Risks

Recession/Lower Ad Spend/Competition

The precocious inflation and rising involvement complaint situation person caused galore analysts to forecast a recession. This tepid situation has spooked advertisers who person pulled backmost advertisement spending which straight impacts Meta's financials. The bully quality is advertizing walk is cyclical and contempt contention from the likes of TikTok, Meta inactive has 1 of the astir precocious advertizing platforms with the astir attraction from monthly progressive users.

Metaverse Payback

The "Metaverse" is inactive an unproven conception some from a exertion standpoint and user adoption. For example, adjacent if Meta tin make a state-of-the-art 3D virtual satellite with a "feeling of presence", determination is thing to accidental that mainstream consumers volition privation to usage this level regularly. Thus this means investors expecting to spot payback connected the $10 billion-plus successful concern whitethorn beryllium disappointed. However, Zuckerberg does person a way grounds of occurrence and a large founder's imaginativeness (with fiscal backing) tin alteration the world. Thus we could besides beryllium astatine a historical time, erstwhile we volition look backmost connected this concern 10 years into the aboriginal and say, "I can't judge we doubted the Zuck". Every caller exertion has a signifier of being criticized by the mainstream. For example, the archetypal mobile phones successful the 1980s/1990s were deemed arsenic dorky and unnecessary, until they reached a "tipping point" of wide adoption. I volition permission you volition this punctuation from Mark Zuckerberg, which could spell down successful history:

"There is inactive a agelong roadworthy up to physique the adjacent computing platform, but we are intelligibly doing starring enactment here.

This is simply a monolithic undertaking. And it's often going to instrumentality a fewer versions of each merchandise earlier they go mainstream, but I deliberation that our enactment present is going to beryllium of historical value and make the instauration for an wholly caller mode that we volition interact with each different and blend exertion into our lives arsenic good arsenic the instauration for the semipermanent of our business."

Final Thoughts

Meta Platforms is experiencing a bid of headwinds which coupled with slowing maturation rates and precocious investments person caused immense banal terms declines. However, the bulk of these issues from FX headwinds to advertiser spending reductions looks to beryllium cyclical. Meta is investing for the aboriginal and the Metaverse adds a important magnitude of "optionality" into the stock. The halfway concern is undervalued intrinsically and comparative to humanities multiples, frankincense semipermanent investors whitethorn beryllium rewarded, but lone those with a beardown stomach.

Senior Investment Analyst for Hedge Funds. Interviewed Hedge Fund Managers and CEO's. Investment Strategy: Focus connected Deep Dive Valuation, G.A.R.P (Growth astatine a Reasonable Price). Masters successful Equity Valuation, 655+ Companies Analysed. 556+ Books work connected Investing.