Why Did Facebook Shares Tank?

(Frederic Legrand - COMEO)
(Frederic Legrand - COMEO)
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A fifth of Meta Platform’s (formerly Facebook) market cap was washed out after yesterday’s earnings report. What’s causing the nearly $200B market value decline in the stock? Let’s explore.


Key Takeaways

  • Total revenue increased 20% YoY to $33.7B for the quarter, slightly beating expectations of $33.4B (0.8% beat)
  • Diluted EPS fell 5% YoY to $3.67, lower than Wall Street expectations of $3.84 (4.4% miss)
  • Guiding to $27-29B in Q1 revenue representing 3-11% growth
    • Falling well short of Wall Street expectations ($30.1B)
  • Management citing short-term headwinds from competition and shifts to short-form video
  • Management citing headwinds from iOS changes

Company Overview

  • Meta Platforms Inc (FB) is builds products enabling people to connect and share through mobile devices, personal computers, VR headsets, and in-home devices.
  • It’s segments include:
    • Family of Apps (FoA)
      • This segment includes Facebook, Instagram, Messenger, WhatsApp and other services.
    • Facebook Reality Labs (FRL)
      • This segment includes augmented and virtual reality related consumer hardware, software, and content.
  • Meta Platforms announced that it will change its ticker symbol to ‘META’ in the first half of 2022, replacing the current symbol ‘FB’
    • It was previously announced that the ticker would change to ‘MVRS’

Q4 Earnings Highlights

Operational

  • Family daily active people (DAP): 2.82 billion average in December, +8% YoY
  • Family monthly active people (MAP): 3.59 billion average in December, +9% YoY
  • Ad impressions: Increased 13% YoY in Q4
  • Price per ad: Increased 6% YoY
  • Capital expenditures: $5.54B in Q4, $19.24B for FY2021
  • Headcount: Increased 23% YoY to 71,970

Financials

  • Q4
    • Revenue | $33.7B, +28.7% YoY
      • Ads: $32.6B, +20.1% YoY
      • Other: $155M, -21.7% YoY
      • Reality Labs: $877M, +22.3% Yoy
    • Income (loss) from operations | $12.6B, -1.5% YoY
      • FoA: $15.9B, +20.3% YoY
      • Reality Labs: $(3.3B), from $(2.1B) in Q4 2020

Guidance

  • Q1 revenue | $27-29B, representing 3-11% YoY growth
    • Previous analyst estimate: $30.1B
    • Meta Platforms cites headwinds to impression and price growth
  • FY2022 expenses | $90-95B
    • Updated from prior outlook of $91-97B
  • FY2022 capital expenditures | $29-35B
    • Unchanged from prior estimate
    • Driven by investments in data centers, servers, network infrastructure, and office facilities

Management Commentary

Mark Zuckerberg, Founder + CEO

  • On the 7 major investment priorities:
    • “I’m going to discuss our 7 major investment priorities for 2022. They’re Reels, community messaging, commerce, ads, privacy, AI and, of course, the metaverse. And these are the areas that we’re putting a lot more talent and budget towards.”
  • On two near term factors:
    • “As a result of both competition and the shift to short-term — short-form video as well as our focus on serving young adults over optimizing overall engagement, we’re going to continue to see some pressure on impression growth in the near term.”
    • “I’m confident that leaning harder into these trends is the right short-term trade-off to make in order to get long-term gains. And we’ve made these types of transitions before with mobile Feed and Stories, where we took on headwinds in the near term to align with important trends over the long term. And while video has historically been slower to monetize, we believe that over time, short-form video is going to monetize more like Feed or Stories than like Watch.”
  • On advertising changes (iOS, GDPR):
    • “With Apple’s iOS changes and new regulation in Europe, there is a clear trend where less data is available to deliver personalized ads. But people still want to see relevant ads, and businesses still want to reach the right customers. So we are rebuilding a lot of our ads infrastructure so we can continue to grow and deliver high-quality personalized ads.”
  • On the metaverse:
    • “People have spent more than $1 billion on Quest store content, helping virtual reality developers grow and sustain their businesses. We had a strong holiday season, and Oculus reached the top of the app store for the first time on Christmas Day in the U.S.”
    • “We’re working towards a release of a high-end virtual reality headset later this year, and we continue to make progress developing Project Nazare, which is our first fully augmented reality glasses.”
    • “Horizon is core to our metaverse division. This is our social VR world-building experience that we recently opened to people in the U.S. and Canada.”

Sheryl Sandberg, COO

  • On headwinds (in addition to competition and short-form video):
    • “We were lapping a period of strong demand in 2020 that benefited from very strong growth in online commerce, which has since slowed.”
    • “Q4 was also the first holiday season after Apple’s iOS changes, which had an impact on businesses of all sizes, especially small businesses who rely on digital advertising to grow. This will continue to be a factor in 2022.”
    • “We’ve also heard from advertisers about other macro trends that contributed to the headwinds in Q4, including global supply chain disruptions, labor shortages and inflationary pressures. A number of industry reports have pointed to people shopping earlier in the holiday season to avoid potential supply chain issues and shipping delays.”
    • “We expect the overall targeting and measurement headwinds to moderately increase from Apple’s changes and from regulatory changes in Q1 and throughout 2022.”
  • On monetizing Reels:
    • “Right now, Reels monetizes at a lower rate than Feed and Stories, but we expect this to improve over time. We’ve made successful transitions before: the shift from web to mobile and then another shift from Feed to Stories. We have a playbook here. The experience we have for monetizing stories is directly applicable, so we’re not starting from scratch.”
  • On key challenges from the iOS changes:
    • “We’ve said there are 2 key challenges from the iOS changes: targeting and measuring performance.
    • “On targeting, it’s very much a multiyear development journey to rebuild our ads optimization systems to drive performance while we’re using less data. And as part of this effort, we’re investing in automation to enable advertisers to leverage machine learning to find the right audience with less effort and reduce reliance on targeting. That’s going to be a longer-term effort.”
    • “On measurement, there were 2 key areas within measurement, which were impacted as a result of Apple’s iOS changes … The first is the underreporting gap. And what’s happening here is that advertisers worry they’re not getting the ROI they’re actually getting. On this part, we’ve made real progress on that underreporting gap since last quarter, and we believe we’ll continue to make more progress in the years ahead.”

Valuation + Analysis

  • Meta Platforms (FB) is trading down near $250 in pre-market trading.
  • At $253 per share, FB trades at a $708B market cap and $660B EV.
  • Analysts originally had FB growing at 19% for FY2022, but those estimates are sure to come down after yesterday’s report.
  • If we get bearish and assume FB only musters 3% growth (the low end of the Q1 growth guide) and margins decline in-line with analyst estimates, the stock would be trading ~11x forward EBITDA.
  • If we believe the EPS retracement continues at -5% through FY2022, FB is trading ~19x P/E.

KR: Meta Platforms hit a trifecta of headwinds to close 2022.

  1. Consumer shift to short-form video (dominated by TikTok)
  2. iOS changes impacting the ad business
  3. Base effects and macroeconomic trends

Mark Zuckerberg and the rest of the leadership team cited the shift to short-form video as a near-term headwind. Facebook and Instagram added Reels to compete with TikTok which has shown traction according to management, but it will take time to shift monetization to this new format. I believe they will find a way to do it as they have before (web to mobile, news feed to stories, etc.), but it will take time and resources.

iOS changes notably impacted Facebook’s ad performance as noted in the call. Targeting and measuring performance became more difficult starting in Q3. Sheryl Sandberg talked about a multi-year development journey ahead to rebuild ad optimization services in this new reality. This will also take time and resources.

Since iOS changes went live in Q3, Facebook still has two quarters of tough comps ahead. Marketplace volume and e-commerce advertising also faced headwinds last quarter as holiday shopping was pulled forward for the holiday season.

On top of all of this, Zuckerberg is steering the ship toward the metaverse. As we know, this will also take time and resources (big capex and investment numbers).

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