Meta (Facebook) Shares Slammed as Earnings, Spending Disappoint

Source: Predictions based on analysts’ consensus from Visible Alpha

Meta (Facebook) Financial Results: Analysis

Meta Platforms Inc. (META) shares plunged 20% to their lowest in almost seven years in after-hours trading on Oct. 26 after the social media giant's third-quarter results fell short of expectations amid mounting spending. The shares remained down more than 20% in pre-market trading Oct. 27.

The operator of Facebook, Instagram, WhatsApp, and Messenger posted Q3 diluted earnings of $1.64 per share. Analysts tracked by Visible Alpha had estimated $1.87 per share on average. While revenue topped the consensus estimate by 1%, it was down 4% year-over-year. Meta's expenses rose 19% from a year earlier, and its headcount increased 28% over the same span. As a result, free cash flow has all but evaporated: Over the past four quarters it has ebbed from $12.6 billion to $8.5 billion, $4.5 billion, and finally to $173 million in the most recent period.

Meta's Revenue, Spending Outlook

Meta projected Q4 revenue of $30 billion to $32.5 billion, compared with analyst expectations of $32.2 billion. CEO Mark Zuckerberg acknowledged "near-term challenges on revenue" in the statement reporting the results. European advertising revenue weakened notably, declining 10% sequentially from Q2.

Despite the downbeat results and outlook, the company is proceeding with investments in infrastructure and virtual reality (VR) hardware. In FY 2023, expenses are expected to rise another 15% or so from FY 2022, based on the midpoints of the ranges the company provided. Capital spending is set to increase as well, from about $32.5 billion in this fiscal year to a range of $34 billion to $39 billion in FY 2023.

Investments Under Fire as Stock Slumps

One widely followed observer on Twitter noted that over the last two quarters, Meta's capital spending has eclipsed that of Alphabet Inc. (GOOGL, GOOG) and Microsoft Corp. (MSFT). "You're spending 30% more in capex than the folks building self-driving cars, beaming internet to penguins in the Galapagos, and also doing Youtube Shorts as a side hustle. It's breathtaking," tweeted @modestproposal1. Google parent Alphabet shut down Loon, a project to provide Internet connectivity from balloons in the stratosphere, in 2021.

Investors' unease with Meta's heavy spending plans as revenue declines had already left the stock down more than 61% in 2022 before the Q3 earnings report. Earlier in the week, a fund manager published an open letter calling on the company to curb costs and capital spending.

Zuckerberg can ignore such criticism without fear of a shareholder revolt. Facebook's founder controls Meta because he owns a special class of shares, with each Class B share conferring 10 votes versus 1 for Meta's common stock.

Meta (Facebook) Earnings Call Recap

The company's rapidly growing spending drew the most questions from the analysts on the Q3 conference call, with some seeking details on the investments' potential returns and others asking whether Meta is neglecting competitive threats to its core business in prioritizing metaverse development.

" I think kind of summing up how investors are feeling right now is that there are just too many experimental bets versus proven bets on the core," said Jefferies analyst Brent Thill on the call. "I think everyone would love to hear why you think this pays off."

Zuckerberg said Meta faces so many challenges it can't afford to focus on just one. "Look, there are a lot of things going on right now in the business and in the world," he responded. "And so it's hard to have, like, a simple 'We're going to do this one thing, and that's going to solve all the issues.' I mean, there's macroeconomic issues. There's a lot of competition. There's ads challenges, especially coming from Apple. And then there's some of the longer-term things that we're taking on expenses because we believe that they're going to provide greater returns over time. And I think we're going to resolve each of these things over different periods of time. And I appreciate the patience. And I think that those who are patient and invest with us will end up being rewarded."

Zuckerberg and other Meta executives on the call said the planned 2023 spending increases will go primarily toward expanding the artificial intelligence (AI) capacity powering Meta's customized content recommendations engine, including for its Reels feature designed to compete against TikTok's videos. The hardware required to run the AI algorithms is leading Meta to upgrade its data centers as well, they said. At the same time, the planned launch of a new Quest virtual reality headset for consumers will cause the loss at Meta's Reality Labs unit to widen significantly next year, according to the company.