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Is Meta Stock A Buy? Facebook Parent Earnings Will Be Bad Or Rotten

The big question for Meta stock ahead of the Facebook parent’s Q2 report after Wednesday’s close is whether there is light at the end of the tunnel or whether the sun has set on its era of social media dominance. Having crashed 57% from its peak last September, Meta Platforms (META) is wrestling with four big headwinds to earnings growth.

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One problem is getting worse, as the rising risk of recession threatens to compound a moderating trend in e-commerce spending. But the reaction to Meta’s second-quarter earnings may depend more on how it’s coping with the other three headwinds. Apple’s privacy change, by making it harder to effectively target online ads, has cut into ad pricing and jolted Meta’s entrenched position as the 800-pound gorilla in display advertising. Competition from TikTok has stymied and threatens to reverse user growth. And, as Meta fights to compete in short-form videos, it has undertaken a costly transition to a new advertising format.

Meta Is A Value Stock

So how does the outlook appear now for the former FANG stalwart, which officially changed its ticker to META from FB as of June 9? With the stock falling much more than earnings to this point, Meta stock has become a value stock. It has a price-earnings ratio of around 13, vs. 16 for the average S&P 500 stock.

That suggests plenty of potential upside — if Meta can weather current challenges and capitalize on its metaverse investments. Yet with so much uncertainty, investors should monitor Meta stock’s chart for validation that the company has really turned the corner.

Meta’s Low Expectations

Here’s an idea of how much the bar has been lowered for Meta. Mizhuo analyst James Lee said in a Monday report that he expects Meta sales to slip 2% from a year ago in Q2. That compares to the consensus for flat quarterly revenue. He also commented that consensus estimates for the second half of 2022 and next year both “appear aggressive.” Yet, Lee kept a buy rating. And his 250 price target, though slashed from 325, still represents about 50% upside.

Analysts expect Meta earnings to fall 29.6% to $2.55 a share, according to FactSet. Full-year earnings forecasts see a drop of 19% to $11.32.

The only saving grace for Meta earnings may be that the company is quickly reining in spending. CEO Mark Zuckerberg told company managers earlier in July to set aggressive targets for employees and weed out those who underperform.

In its Q1 report, Meta scaled back total-year expenses to a range of $87 billion-$92 billion from the prior outlook of $90-$95 billion. That range could fall again.

In Q1, Meta’s Reality Labs division, focused on growing the metaverse via augmented- and virtual-reality headsets and software, lost $2.96 billion in the quarter on revenue of $695 million.

Meta’s Family of Apps — including Facebook, Instagram, WhatsApp and more — had operating income of $11.48 billion on revenue of $27.21 billion.

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Apple Costs Meta $10 Billion

Facebook has been warning since late 2020 about the challenge created by Apple’s privacy change. But the shift that began with the iOS 14.5 update last spring had a modest impact until Q4. Apple now requires apps downloaded through the App Store to let users opt in or out of tracking their activity across third-party sites. With the bulk of users opting out, businesses can no longer narrowly target advertising to consumers likely to have an interest in their products or services.

“We believe the impact of iOS overall as a headwind on our business in 2022 is on the order of $10 billion,” Wehner said on Feb. 2.

The brunt of the hit to year-over-year growth is likely to be felt in the first half of 2022, since the impact of the iOS change wasn’t really felt until the second half of 2021.

Meta is working on changes to make its ad targeting more effective, despite the impact of privacy-related changes. Using artificial intelligence to predict consumer interest as a substitute for tracking user activity isn’t expected to be a quick fix. However, analysts will be eager to hear about any progress.

Facebook’s TikTok Problem

On top of Apple’s privacy change that has made online ads less effective, Meta’s Q4 earnings announcement raised additional concerns that could weigh on growth. The biggest: “We believe competitive services are negatively impacting growth, particularly with younger audiences,” CFO Dave Wehner said in Wednesday’s Q4 earnings call. TikTok was the only competitor mentioned by name.

Probably the best news for Meta in the Q1 earnings report was that users aren’t deserting Facebook. “More people use our services today than ever before,” CEO Mark Zuckerberg said in the April 27 earnings statement. Daily active Facebook users rose to 1.96 billion from 1.929 billion in Q4. With users in the U.S. and Europe essentially moving sideways, the growth came from the Asia-Pacific and other regions. One caveat: The loss of users in Russia, after it blocked Facebook, won’t be fully accounted for until Q2.

However, Morgan Stanley analysts wrote in a recent report that time spent on Meta’s family of apps fell 1% from a year ago. An even bigger 3% drop in time on Facebook was partly only offset by tepid growth at Instagram.

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Meta’s Ad Transition

Trying to combat the TikTok threat and up its game with young adults has created another headwind to Meta’s earnings power. Meta is now focused on driving user engagement via its Reels short-form video feature, yet there are “relatively few ads in Reels today,” Wehner said on Feb. 2.

Later in February, Meta announced the release of two ad formats for Reels that are semitransparent so as not to interfere with the video content.

While Meta expects that Reels will prove fertile ground for monetization, that will take time. Meanwhile, Reels growth will weigh on overall results, since Meta algorithms will preference the short-form videos, meaning less growth for more ad-heavy News Feed and Stories formats.

In fact, Meta seems to be doubling down on its promotion of short-form videos, as it tries to make headway against TikTok. On July 21, Meta said that Facebook users will henceforth be directed to a new “Home” entryway, where they will encounter curated content such as Reels videos. Posts from family and friends will be found by clicking on a new “Feeds” tab.

Analysts will be eager to hear how long and to what extent Reels will continue to be a drag on revenue.

Meta Stock Analysis

Since crashing 26% on Feb. 3, following its Q4 earnings report, Meta stock has made four rally attempts to its 50-day line. But each rally has failed, the latest coming on Friday, after social media rival Snap missed Q2 views and failed to offer Q3 guidance.

Meta stock has yet to break a downtrend of lower highs and lower lows. That negative pattern has carried all the way since Sept. 1, when Meta hit an at all-time high of 384.33.

Meta shares fell through their 50-day line on Sept. 20, offering a sell signal. That was two days ahead of the company’s Sept. 22 blog post warning of a “greater impact” from Apple’s recent iOS updates.

Facebook’s Metamorphosis

Facebook’s Oct. 28 name change to Meta Platforms made sense for multiple reasons. It’s probably no coincidence that it happened as Facebook was being treated as a political pariah, alleged to profit from pushing politically divisive content and harming vulnerable teens. The name change also may have been a bid to get distance from Facebook’s less-than-cool image among young people. “You won’t need a Facebook account to use our other services,” CEO Mark Zuckerberg said in introducing the Meta name.

But the Meta name also speaks to Zuckerberg’s broader ambitions to lead social networking into the “next frontier.”

That frontier will be three-dimensional, allowing for immersive experiences. “The defining quality of the metaverse will be a feeling of presence — like you are right there with another person or in another place,” he wrote.

“Our hope is that within the next decade, the metaverse will reach a billion people, host hundreds of billions of dollars of digital commerce, and support jobs for millions of creators and developers.”

Meta is expected to release a high-end virtual reality headset later this year that will be far more expensive than its top-selling $299 Quest 2.

One more key reason Zuckerberg wants to produce the hardware for that next frontier: He wants to help set the rules, rather than have the likes of Apple set standards. But Meta has slowed down spending on its reinvention amid slower growth.

Meta Stock: Is It A Buy?

Meta management has compared its current transition to Reels monetization to earlier successful content transitions, like the shift to Stories and mobile. But this time is different. User growth has run out of steam amid growing competition, while privacy changes have undercut its display advertising dominance. At the same time, Meta is still spending a lot to position for metaverse potential that may not come to fruition for years. All that makes it harder to have faith in the strength of Meta’s rebound, which will be postponed until recession clouds disperse.

Bottom line: Meta stock is not a buy.

Be sure to read IBD’s after-the-close The Big Picture column each day to make sure growth investors have a green light.

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