Meta Platforms Inc (NASDAQ:META)
Investors have been enthusiastically betting that the company’s new focus will pay off with higher margins and improved profitability. Meta Platforms is the parent company of social networks Facebook, Instagram, and WhatsApp. In recent months, the company has gotten religious about cutting costs. The next part of the story will be unveiled on Wednesday when the company reports the financial results for the March quarter.
The Year Devoted to Economy Continues Apace
The company’s simply disastrous third-quarter results from the previous year set the stage for Meta (NASDAQ:META) CEO Mark Zuckerberg’s current crusade. In those results, Meta promised to ratchet up spending, a plan that investors found tone-deaf and ill-advised.
Just a few days before the earnings report, Altimeter Capital’s founder Brad Gerstner argued that the company needed to reduce spending and headcount by at least 20% in order to improve its financial performance. However, Zuckerberg did not do that, at least not on that particular day. As a result, the stock dropped by 25 percent on the day that followed the report, and it continued to fall in the days that followed, trading below the $90 level.
However, since that time, Meta shares have experienced a remarkable upswing, climbing 140%. This action was kicked off by the company’s announcement on November 9 that it would be cutting 11,000 jobs, and it was accelerated by the company’s earnings report for the December quarter, which included another 10,000 job cuts. However, the underlying financial performance of the company continues to be problematic, as this is likely to be the fourth quarter in a row with negative year-over-year revenue growth. This is due to a lackluster performance in the online advertising market as well as ongoing pressure from competitors, most notably TikTok.
If Zuckerberg has another round of cost-cutting measures in the works, Wednesday would be the day to make the announcement. Wall Street will also be looking for indications that the previous cuts are beginning to pay off with higher margins, and analysts will be on the lookout for any indications that the company may be planning to reduce the scope of its metaverse ambitions.
For the March quarter, Meta anticipates revenue between $26 billion and $28.5 billion, which, at the midpoint, would be a decrease of approximately 2.4% from the same period in the previous year. According to the average forecasts of Wall Street analysts, as compiled by FactSet, the company is expected to bring in $27.7 billion in revenue and report a profit of $2.02 per share.
Another crucial piece of information to keep an eye on is the operating income, which is anticipated to be $6.7 billion. This is due to the anticipated profit of $10.3 billion from the Family of Apps segment, which includes the company’s social media offerings. However, this is more than offset by the anticipated loss of $3.9 billion from the company’s Reality Labs segment, which includes its virtual reality headset and metaverse businesses. It is anticipated that advertising revenue will total $26.8 billion.
Regarding operational metrics, Wall Street estimates that there are 3 billion monthly active users and slightly more than 2 billion daily active users for the platform.
RBC Capital analyst Brad Erickson wrote in a recent research note that he leans more cautious heading into the quarter given some signs of softening in the ad market. The note was published in response to a question regarding the analyst’s outlook for the quarter. Despite the fact that he believes revenue for Q1 will be closer to the upper end of the guidance range, he maintains that guidance for Q2 should at the very least be in line with the current consensus on Wall Street, which is $29.5 billion. On the stock, Erickson maintains his Outperform rating and his target price of $225.
Analyst Justin Post from BofA Global Research also reaffirmed his bullish stance on the stock prior to the release of the report. He maintained his Buy rating and $250 price target for the stock. He believes that problems in the financial sector will put some strain on the amount of money spent on advertisements. His projection for revenue comes in at $27.1 billion, which is lower than the consensus estimate.
As the lower headcount and other expense cuts begin to roll through financial models, Post believes that the biggest positive call takeaway could be hinting about an upside to the Street 2024 EPS consensus forecast, which is currently at $12.46 a share. But Post also notes that the most significant threat could come from the revenue forecast for Q2 provided by Wall Street, which assumes sequential growth of close to 9%.
“We like Meta’s revenue set up for potential acceleration,” writes Post, pointing to improved monetization of Reels and messaging, as well as improved targeting driven by artificial intelligence. “While we think ’23 recession uncertainty is likely to keep a lid on sector revenue estimates, we like Meta’s revenue set up for potential acceleration.” “Also, the threat posed by TikTok is diminishing as a result of lower advertiser adoption, while TikTok regulation could drive upside.”
James Lee, an analyst at Mizuho, has a positive outlook on the quarter as well. Despite the fact that positive investor expectations have already been set, Lee, who has a Buy rating on the stock and a target price of $235, believes that the setup into earnings appears to be positive.
We believe that positive leading indicators in engagement should provide downside protection for FY ’23, despite the fact that macroeconomic uncertainties continue to be an overhang. In addition, we believe that there is a substantial amount of room for cost optimization,” Lee writes.
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