"And through the drifts the snowy clifts
Did send a dismal sheen:
Nor shapes of men nor beasts we ken—
The ice was all between." Samuel Taylor Coleridge The Rime of the Ancient Mariner (text of 1834) Pic: WASHINGTON, DC - JULY 29: Facebook CEO Mark Zuckerberg speaks via video conference during the House Judiciary Subcommittee on Antitrust, Commercial and Administrative Law hearing on Online Platforms and Market Power in the Rayburn House office Building, July 29, 2020 on Capitol Hill in Washington, DC. (Photo by Mandel Ngan-Pool/Getty Images)
Next Small Thing: Jesus Jimmy Cameron Christ! I think Meta is headed straight for that great, big Zuckerberg!
Presenting Stockhead’s Next Small Thing – every Friday our crack team of ill-tempered braggards will track the latest moves of their favourite early-stage small caps.
Today, across global money, securities and credit markets, we believe the leading investment banks, brokerages and financial media – well, mainly the AFR – have for too long neglected the rich research opportunities of what we at SH call the Early Stage Small Cap, and its related fields of Start-Downs and End-Downs.
In this exclusive and oftentimes silly series, we scour the equities world for the big names on the fast-track to oblivion. Be it war, vanity, hubris or just plain old, garden variety stupidity – here at Stockhead we know – inside every blue chip, tech giant or large cap there’s a small, micro or anti-cap just itching to get out.
This week Christian heads out to Silicon Valley where social media pariah and outstanding small cap aspirant Meta’s third-quarter results are in and Wall Street punters and analysts split on the struggling tech stock.
A third quarter of pure strategic waywardness caught up with the Facebook Mothership Meta Platforms (META) in after hours trade this week, plunging on down by some 20% Thursday night Sydenham time after it missed earnings expectations in what Christian Edwards (me) said (wrote) for highly-respected (says us) Australian title Stockhead was a dreadfully mixed Q3 earnings report.
“This is a dreadfully mixed Q3 earnings report,” I’m saying (writing) right now. Meta scored a beat on revenue, but missed on profits and then warned that booking near-term sales faces its challenges.
That admission wiped $65 billion off Meta’s market cap.
But does Meta have legs?
#Meta finally announced its most requested feature: LEGS!
When asked for comment, Mink Zuckelfarg said: “I am very proud of our team’s achievements in the digital appendage sector. We are out here solving very complex problems… pic.twitter.com/YTKAW0e8wG
Monthly active people was 3.7 billion up from 3.6 billion a year ago.
“Sure it didn’t grow much but that’s to be expected given the penetration level.”
However, Dr Mahanti says the worry for Zucker is that average revenue per user dropped to US$7.53 vs US$8.18 a year ago.
“And Meta is spending insane amounts of capital on its metaverse dreams. Capex was US$9.4 billion in Q3’22 alone!!!”
“They have spent US$27.6 billion in capex over the TTM. That’s phenomenal.
“Some of this is for data centres and such but a lot of it is their investments in reality labs (VR/metaverse, peculiar things like this). And yet for all of this spending, there’s not much to show – Reality Labs has delivered an operating loss of US$3.7 billion this quarter alone!”
Themselves free from common sense, retail traders on the investment trading platform Capital.com apparently poured into the vaccuum created by the intensity of Meta’s foolishness on the Meta stock price.
Single day trading volumes in the MAANG stock jumped by circa 850% while the number of new traders rushing to get a piece of whatever they think Meta can become, also rose by 288% after the dive.
“Traders seem to be buying the dip in Meta — I liken this to catching a falling knife. While Meta shares might already have fallen a sizable ~70% this year, the outlook remains bearish in the near term. The outlook for Q4 remains pretty bleak with the company stating that the impact of a strong USD would be a 7% headwind to year-over-year revenue growth.
“Alongside this, Meta’s big bet on the Metaverse has not paid off with their reality labs business having lost over $9 billion this year. The Metaverse bubble appears to have well and truly popped.”
Meta has faced investor calls to reduce spending on the metaverse as lower user growth numbers and reduced ad spending have cut into its results. Meta reported a loss of US$10.2 billion on revenue of US$2.3 billion for FRL in 2021, and the company has said it is committed to spending even more on the division for the next several years, seeing it as a crucial driver of future growth.
For the company as a whole, Meta reported adjusted quarterly earnings per share for the third quarter of US$1.64, missing the analyst consensus estimate of US$1.90, according to FactSet, while Meta’s overall revenue of US$27.7 billion beat estimates of US$27.4 billion. It guided for Q4 revenue between US$30 billion to US$32.5 billion, which at its midpoint of US$31.25 billion was short of the consensus estimate of US$32.3 billion.
Bank of America downgraded shares of Meta to neutral from buy, adding that Meta’s huge investment in the metaverse is likely to remain an “overhang” on the stock, noting that analysts are unlikely to back out metaverse spend from earnings per share (EPS) for valuation purposes given the lack of progress with users, potential new competition from Apple and a “higher cost of capital mindset.”
Mark Zuckerberg. The Facebook founder’s net worth of US$38.1 billion ($58.7 billion) – not so good after topping US$142 billion ($220 billion) in September last year.
Hard to imagine someone can lose US$100 billion in a little over a year.
The meta selloff followed a megacap selloff prompted by the earnings of fellow tech giants Alphabet (GOOG) and Microsoft (MSFT) (and even Snap – SNAP – last week).
Serious concerns have surfaced in the advertising space, partly due to Apple’s (AAPL) privacy changes, as well as rising competition from rivals like short-form video app TikTok.
Meta numbers in USD:
Meta’s revenues fell by 4%, better than expected, to land at $27.7B,
Costs and expenses weighed on operating income – down 46% to $5.6B.
Facebook daily active users rose 3% to 1.98B, above an expected 1.86B
Monthly active users rose 2% to 2.96B (just short of expectations for 2.97B).
“Family of Apps,” (Instagram and WhatsApp et al) family daily active people rose 4% to 2.93B,
Family monthly active people rose 4% to 3.71B
Ad impressions across the family rose 17%
Average pricing per ad fell 18%
Revenue from Reality Labs, (Zuck’s metaverse unit), nearly halved to US$285M
Losses were US$3.7B compared with US$2.6B a year ago.
Meta expects operating losses for the RL division to “grow significantly year-over-year” (but still believes that’s where its future lies, because Zuck does and it’s too late now).
Reality Labs has put away some $9.4B tin 2022
“While we face near-term challenges on revenue, the fundamentals are there for a return to stronger revenue growth,” Zuckerberg said in his wonderfully psychological case-workerishly earnings calls.
“I appreciate the patience and I think that those who are patient and invest with us will end up being rewarded.”
The tech stock is already down more than 60% year to date as the company deals with a raft of issues.
Both Credit Suisse and UBS are hopeful downward revisions to OpEx and CapEx are done, and that Meta’s likely seen the worst of revenue headwinds (reels and comps), which should see estimates move higher ahead.
UBS maintains their buy, but cut their FY23 EPS estimates to $7.80 per share (from $10.50 previously) and target price to $121 (from $157 previously).
Credit Suisse maintains its Outperform rating on the potential for positive operating margin and FCF growth inflection starting in 4Q23 and accelerating thereafter, as well as Meta’s ‘potential for better-than-expected ad revenue growth given increased monetisation of Instagram and other properties/Reels. They also hope Reality Labs investments moderate as Meta unlocks greater efficiencies.
Morgan Stanley’s downgraded Meta to Equal weight from Overweight and almost halved its price target to US$105 from US$205.
“We see META’s US$69bn of capex over 2 years and AI-driven data center build as a sign of structurally higher capital intensity,” Morgan Stanley’s Brian Nowak wrote in a Thursday note. “While these investments could make META stronger over 5 years, we see ’23 FCF heading 60% lower and higher risk to prove ROIC and incremental growth.”
Others also downgraded the stock because of higher-than-expected expenditures in 2023.
Cowen’s John Blackledge downgraded Meta to Market perform from Outperform, and lowered the price target to US$135 from US$205 again citing the higher opex and capex trajectory.
Bank of America has kept its Neutral rating, also lowering the price target to US$136 from US$150, calling the results a mixed bag.
BoA’s ’s Justin Post:
“Clearly the street didn’t think the company would take investments this far while revenues were under pressure, but there were some underlying positives, including traction for much-anticipated messaging monetisation.”
JPMorgan has also smothered the Meta price target with a pillow, to US$115 from US$180:
“It’s unclear when the Facebook parent will see a return on its big metaverse and AI investments.”
Crazy Goldman Sachs people kept a buy rating on Meta, while lowering the price target to US$165 from US$200, saying they remain focused on Meta’s “large scaled audience” across its social media platforms, in spite of the expected rise in spending.
“Taking a step back from the recent stock performance (both YTD and in the after-market), we see platform/infrastructure investments by Meta (which started in mid-2020) as both a) continuing to build independence from a volatile range of outcomes from future mobile OS platform changes; and b) aligned with a strategic shift toward short-form video and from the social graph to the interest graph,” Sheridan wrote in a Thursday note.
But perhaps the last word belongs to Dr Mahanti:
“In Meta, we have a stable but slow growing core business, but the drunken sailor in chief in his quest for the next big thing is spending like money is infinite on a bet that is highly speculative.
What credentials does Meta have in consumer electronics after all?
“Meta’s spending binge is killing free cash flow, which dropped to a mere few hundred million dollars this quarter.”
Where is the thoughtful capital allocation decision here?
Where indeed, doctor, where indeed.
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