Meta Q4 earnings preview: Where next for Meta stock?

When will Meta release Q4 earnings?

Meta is scheduled to release fourth quarter earnings after US markets close on Wednesday February 1. A conference call will be held on the same day at 1400 PT (1700 ET).

Meta Q4 earnings consensus

Meta is forecast to report a 6.2% year-on-year decline in revenue to $31.57 billion in the fourth quarter while diluted EPS is expected to decline 39% from last year to $2.25.

If achieved, that puts Meta on course to report a 1.6% fall in annual revenue to $116.03 billion and a 34% fall in full year EPS to $9.06.

Meta Q4 earnings preview

Meta was the biggest loser in the Big Tech space in 2022, when it lost almost two-thirds of its value as the advertising market stalled and social media stocks grappled with a myriad of headwinds. Meta still adjusting to Apple’s privacy changes that have made it more difficult to target ads at users and a shift to less-lucrative video formats in response to more intense competition with the likes of TikTok.

These additional headwinds mean the price of adverts on social media sites have fallen far more rapidly than other digital platforms. For example, prices fell around 18% on Facebook in the third quarter, while Alphabet’s Google Search suffered a much milder decline of 5%. Meanwhile, costs continue to rise and earnings are under pressure.

Together, that is expected to see Meta report its third consecutive quarter of lower sales and the fifth straight quarter of lower earnings when it reports results.

Markets also expect Facebook will see daily active users fall to 1.90 billion at the end of 2022 from 1.98 billion at the end of September, which will only add to its woes and fuel further speculation that some of its social media platforms have reached their peak. Any fresh signs that its core business is hurting could be significant considering the lack of major new catalysts on the horizon.

(Source: Bloomberg)

Lacking a revival in growth, the best thing Meta can do is demonstrate that it is getting a grip on costs and protecting profitability in these tougher times. This would help install confidence that it can weather the storm and bounce back in better condition when the recovery eventually comes.

Meta has already started to take action after cutting 11,000 jobs, representing around 13% of its workforce. Although that is one of the largest workforce reductions announced to date, it is still shallow considering Meta’s workforce has more than doubled in size since the start of the pandemic. This should help it improve free cashflow, which is expected to exceed $2.1 billion in the fourth quarter compared to less than $200 million in the third quarter.

(Source: Company reports)

Another controversial topic that is likely to come under the spotlight in 2023 is Meta’s costly investment into the metaverse. Meta is spending billions on a project that is not expected to yield any form of return for years to come, and that is during one of the most challenging times for its core social media and advertising business. In fact, its Reality Labs unit that is responsible for its metaverse projects is forecast to report a loss of $3.9 billion this quarter – the largest on record. That could see the division burn through over $13 billion in 2022 as a whole, and this is expected to swell further in 2023.

(Source: Bloomberg)

The company remains committed to its future in the metaverse but cutting investment here would be the easiest way to protect the bottom-line without impacting the business that drives Meta today – although that would come with the risk of losing its leadership in what it believes is its new long-term opportunity.

Meta could try to counter the criticisms surrounding its investments in the metaverse by delivering new catalysts that can provide new sources of income. The company has said it expects its monetisation efforts for WhatsApp and Messenger to payoff way before the metaverse.

What is the outlook for Meta in 2023?

2022 is set to mark the first drop in annual revenue and earnings for Meta since it went public back in 2012, a matter that has wiped over $500 billion off its valuation over the past year.

Meta has warned that earnings will remain under pressure in 2023 and markets expect EPS to decline another 13% this year, which will overshadow the anticipated return to growth in revenue. Most of Big Tech is expected to see profits start to grow again this year as they start to come up against weaker comparatives.

This suggests Meta could underperform in terms of results again in 2023, although its valuation is far below the market average and its tech rivals which has attracted buyers back into the market that are looking at the stock’s potential recovery once the economy gets back on the right track.

It also suggests that Meta is facing the greatest pressure to cut costs and slimdown, with margins forecast to be squeezed to its tightest on record in 2023. As a result, its outlook for this year, especially for costs and capital expenditure, could prove highly influential on how the share price reacts to the results.

Without further action, we could see free cashflow fall over 25% in 2023 to around $10.9 billion, which would be the lowest cash generation since 2015. That is significant when you consider it is forecast to sink over $17 billion into Reality Labs alone this year, with losses peaking before starting to ease from 2024 onwards.

Meta has budgeted $34 billion to $39 billion in capital expenditure in 2023 and has said operating costs should decrease as it cuts jobs and finds savings. It has said its headcount will remain broadly flat this year.

Is Meta stock undervalued?

Meta shares are currently trading near four-month highs, but the stock is still down 62% from the all-time highs we saw back in September 2021.

Even after the recent rally, Meta trades at a blended-forward price-to-earnings ratio of 13.5x. That remains well below the wider market considering the tech-heavy Nasdaq 100 trades at around 23.0x with the S&P 500 at 19.0x. It is also below Meta’s five-year average valuation multiple of 18.8x. This means Meta is cheap, but this is because Meta looks riskier than other members of Big Tech at present. It appears Meta is offering greater risk with greater potential rewards at present.

This explains why Meta shares have been finding higher ground in early 2023, even if its growth prospects bleak over the next year. Still, some investors see an opportunity to buy now to reap rewards when earnings return to growth, with Wall Street forecasting the bottom-line will start to rise again in the second half of 2023.

Where next for Meta stock?

Meta shares have rallied almost 60% since hitting 7-year lows in early November, although it is finding it harder to find higher ground. The RSI has slipped into overbought territory and that has prevented the stock from pushing above $144 over the past three sessions.

A move above here would allow it to climb to new four-month highs and open the door to $155 to recapture the level of support we saw throughout the second half of 2022. That is also in-line with the 200-day moving average. The 58 brokers that cover the stock see slightly greater upside potential considering the average target price sits at $156.50.

The 100-day and 50-day moving averages could provide some support if it comes under renewed pressure, although $113 could prove more reliable. Any slip below here could see it fall $108.50.

Take advantage of extended hours trading

Meta will release earnings after US markets close and most traders must wait until they reopen the following day before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

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