Meta “risks being the next generation tech fossil” – results reaction from Neil Campling, Mirabaud Equity Research

by | Oct 27, 2022

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Written by Neil Campling, head of TMT research at Mirabaud Equity Research

In the new world reality (rather than the virtual reality world that Meta seems determined to spend $10s of billions on), companies have been getting the message that they need to focus on costs, profitable growth, tangible ROI and deliver operating leverage.

The 2020 party of “growth at any price” funded by Central Bank printing presses is not just over, but even the hangover has worn off. The frustration for Meta investors is that Mark Zuckerberg seems to be wearing a pair of Oculus VR glasses 24/7 and hasn’t realised that his VR isn’t aligned to R (aka Reality, aka Returns, aka Responsibility to shareholders).

All the company had to do was look at investors’ WhatsApps, iMessages, Facebook Feeds or the WSJ, the FT or the various online forums – to realise that they wanted one clear message from tonight’s print: REIN IN THE COSTS. Guess what they didn’t do in this release? Rein in the costs.

Meta reported Q3 EPS/op. profit below the St while revenues of $27.7MM were about inline (note that there is an impairment loss of $413MM – this was a one-time headwind for earnings). DAUs were 1.98B (not that this really matters any more), an increase of 3% YoY, and MAUs 2.96B, +2% YoY. Ad impressions delivered across the Family of Apps increased by 17% YoY, but average price per ad fell -18% YoY.

The company repurchased $6.55B in stock during the Q (this is up from $5.08B in Q2). Guidance for December revenues is $30-32.5B, street is already at the high end at $32.2B). 2023 headcount will be about flat versus where it ended in Q3:22, and the 2022 Opex will be $85-87B. You could argue this is $1B lower (at the high end target point) of the previous $85-88B range – but that is splitting hairs. Midpoint of revenue guidance is $1B lower, costs are only $500m lower. But even that is “small beer” compared to the cost guidance for 2023. Didn’t they get the cost memo?

They are targeting 2023 expenses of c.$96-101B. So, we are looking at a potential 19% increase in costs in 2023. And the entire range is higher than the Street’s $93B forecast. They have delivered no proof that cost hikes lead to revenue increases so far. After all, 2022 is likely to be a year that equates to revenues falling -3% YoY, and operating profit collapsing by 30% YoY. If Q4 comes in at the mid-point of guidance, we are looking at a -7% YoY revenue growth number: an all-time low, and one which doesn’t justify a ramp in operating expenses and collapse in free cash flow.

Bottom Line: the big negative in our view is the 2023 expense outlook as investors were hoping the company would aggressively cut costs. But no.

If you want to be bullish, you might say “but wait – the company believes in itself and the valuation, because it bought a ton of stock.” I’d answer: go ask IBM investors c.2005 whether that was a good trade. Like IBM symbolises dinosaur tech 1.0… so Meta faces the risk of being the next generation fossil.

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