Meta Platforms, formerly known as Facebook, is set to report its third quarter 2022 earnings results after market close on Wednesday, October 26. Investors are keenly watching this earnings release, as Meta’s stock price has declined over 55% year-to-date amid a broader selloff in technology and growth stocks. Expectations are low heading into the print, with Wall Street analysts forecasting revenue to decline 4.5% year-over-year – the second consecutive quarter of negative growth for the social media giant.
Meta’s advertising business has been negatively impacted this year by macroeconomic challenges, privacy changes on iOS, TikTok’s ascendance, and currency headwinds. However, there are some signs of optimism. The US dollar has pulled back recently from its peak, which could provide a tailwind to international revenue. Engagement trends on Facebook and Instagram are stabilizing after declining earlier this year. And Meta’s investments in areas like short-form video, messaging, and the metaverse position it well for long-term growth.
What is the consensus estimate for Meta’s Q3 earnings?
According to Bloomberg, Wall Street analysts expect Meta to report:
– Revenue: $27.4 billion, down 4.5% year-over-year
– Earnings per share (EPS): $1.90, down 41%
Revenue estimate
The consensus revenue estimate of $27.4 billion would represent the second consecutive quarter of negative year-over-year growth for Meta. Here is how quarterly revenue has trended over the past year:
| Quarter | Revenue | Growth |
|---|---|---|
| Q3 2021 | $29.0 billion | 35% |
| Q4 2021 | $33.7 billion | 20% |
| Q1 2022 | $27.9 billion | 7% |
| Q2 2022 | $28.8 billion | -1% |
| Q3 2022 (estimate) | $27.4 billion | -4.5% |
EPS estimate
Analysts forecast Meta’s Q3 earnings per share to come in at $1.90, down 41% compared to $3.22 in the prior year period. This steep EPS decline reflects slower revenue growth and margin compression stemming from Meta’s investments in the metaverse, AI, and platform security.
What is Meta’s Q3 guidance?
For the third quarter, Meta guided for:
– Revenue of $26-28.5 billion, translating to a year-over-year decline of 0-10%.
– Operating income of $5.5-8 billion, down from $12.2 billion in Q3 2021.
This outlook reflects the challenging operating environment and foreign currency headwinds Meta is facing. The company generates over 50% of its revenue internationally, so the surging US dollar dampens growth when foreign sales are translated into dollars.
The wide revenue range also underscores the uncertainty in the demand environment. Advertiser spending on social media platforms has fallen recently amid rising economic concerns. However, Meta’s guidance does imply a modest sequential improvement from Q2’s revenue result of $28.8 billion.
What factors will drive Meta’s results?
Here are some of the key factors that could impact Meta’s third quarter performance:
Advertising demand
The biggest swing factor is advertising demand. Ad spending is highly sensitive to the economic climate. With inflation high, interest rates rising, and fears of a recession escalating, marketers have pulled back spending on digital platforms like Facebook and Instagram.
Macro pressures have also contributed to lower consumer engagement in some markets. Daily active users (DAUs) on Meta’s family of apps declined 1% sequentially to 2.93 billion in Q2 2022 – the first ever user decline in the company’s history. If the economic slump deepens further, it could negatively impact ad revenue and user growth.
Impact of Apple’s iOS changes
Apple’s privacy changes on iOS, which allow users to block tracking of their data for ads, has been a major headwind for Meta’s ad business. Meta CFO Dave Wehner has said these changes could cost the company over $10 billion in 2022 revenue.
The impact has diminished over recent quarters as Meta adapts its ad targeting and measurement tools. But it remains a drag, making Meta’s ads less effective and its user data less valuable.
Competition from TikTok
The meteoric rise of short-form video app TikTok poses a competitive threat to Meta’s family of apps like Instagram Reels. TikTok now reaches over 1 billion monthly active users globally and is competing aggressively for advertising budgets.
Mark Zuckerberg has called out TikTok as one of Meta’s fiercest competitors. Winning the battle in short-form video is crucial for Meta to continue taking share of the $1 trillion global advertising market. Instagram Reels engagement and monetization trends will be an important area to watch this earnings report.
Metaverse / Reality Labs results
Meta is investing heavily in its vision for the next computing platform – the metaverse – via its Reality Labs segment. Reality Labs generated revenue of $452 million in Q2 2022, up 48% year-over-year. However, it also lost $2.8 billion as Meta ramps investment in this new technology.
Investors will be watching closely for updates on metaverse metrics like active users, engagement, and monetization rates on Horizon Worlds and Horizon Venues. But the main focus will be on Reality Labs’ bottom line loss – projected operating losses for 2022 recently ballooned from $10 billion to $15 billion.
Stock repurchases
Given slowing revenue growth, Meta plans to repurchase $24 billion of its stock this year to provide support. The company returned $5.08 billion to shareholders via buybacks and dividends last quarter.
Stock repurchases reduce share count and boost EPS. But with the stock price down 55% year-to-date, Meta is able to buy back much more stock now versus earlier in the year. The pace of buybacks and forecast for capital return will be important gauges of management’s confidence.
Cost controls and spending outlook
Meta has tempered expenses this year in response to the weak business climate. Operating expenses came in below guidance last quarter as the company slowed and paused hiring in certain areas. Headcount still expanded 28% year-over-year in Q2, but that marked the smallest increase since 2020.
Management’s commentary around cost controls and spending discipline – especially related to metaverse investments – will provide clues on profitability moving forward. Operating margin compressed to 29% last quarter from 43% the prior year, so stabilizing margins is crucial.
What are the bull and bear cases for Meta’s stock?
Meta’s stock has underperformed dramatically this year amid the growth headwinds outlined above. But there are convincing arguments on both sides for where shares could trend after earnings.
Bull case
1. Stabilizing user engagement and strong monetization capability support an advertising rebound as macro uncertainty eventually passes.
2. Meta is well-positioned to monetize key trends like video, messaging, e-commerce, and the metaverse – its family of apps reach 3.65 billion people monthly.
3. The stock is cheap trading at just 14 times forward earnings compared to 10 year average P/E of 25x.
4. Meta has an impeccable balance sheet with $40 billion in net cash to fund investments and weather downturns.
5. CEO Mark Zuckerberg has proven naysayers wrong repeatedly by evolving Facebook into a leading mobile app and making key acquisitions like Instagram and WhatsApp.
Bear case
1. Macro headwinds could persist, weighing further on ad spending and user engagement.
2. Apple’s privacy changes and competition from TikTok structurally damage Meta’s data advantage and growth trajectory.
3. Huge investments in unproven bets like the metaverse destroy shareholder value and crush margins.
4. Younger users increasingly shun Facebook in favor of newer social apps – jeopardizing the company’s long-term stickiness.
5. Regulation and civil lawsuits related to data privacy, AI ethics, and anticompetitive practices present major risks.
What options trades could be profitable around earnings?
Here are a few options trading strategies to consider around Meta’s earnings print based on directional assumptions:
Bullish trades
– Buy calls – Gives you exposure to upside with limited downside risk. The October 28th $140 strike calls could pay off nicely if Meta stock pops after earnings.
– Sell puts – Selling puts obligates you to buy the stock at a lower “strike” price if assigned. This strategy generates income and targets entry at a lower level. Consider the October 28th $110 puts.
– Call spreads – Caps upside but is cheaper than long calls. Can target modest upside, like buying the October 28th $130 calls and selling the $140 calls.
Bearish trades
– Buy puts – Buying puts offers capped risk with the ability to profit if Meta shares fall after earnings. Look at out-of-the-money puts like the October 28th $100 or $90 strikes.
– Sell calls – Selling covered calls sells upside in exchange for income. Consider the October 28th $140 or $150 strikes if you already own the stock.
– Put spreads – Selling a lower strike put against a higher strike put caps risk. For instance, sell the October 28th $100 puts and buy the $90 puts.
No matter the directional assumption, it’s wise to size positions appropriately and utilize stop losses to contain potential losses. The amount of implied volatility priced into Meta options suggests a large post-earnings move is expected.
Conclusion
Meta is set to report Q3 2022 earnings results on October 26th after market close. The consensus expectations call for revenue to decline 4.5% and EPS to fall 41% compared to last year. However, the actual results could vary widely depending on advertising demand, iOS impacts, metaverse investment levels, and other factors.
Meta’s stock has underperformed dramatically in 2022, but still represents a battleground situation for bulls and bears. There are compelling arguments on both sides. The earnings print and management’s commentary will provide critical insights on user and financial trends.
Options traders can position around earnings to express directional assumptions using strategies like long/short calls or puts, call/put spreads, and covered call writing. Implied volatility indicates a large share price swing is expected after Meta reports Q3 results.