Meta (NASDAQ:META) Misses Q2 Sales Targets

Full Report / September 20, 2022
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Social network operator Meta Platforms (NASDAQ: META) missed analyst expectations in Q2 FY2022 quarter, with revenue flat year on year at $28.8 billion. Guidance for the next quarter also missed analyst expectations with revenues guided to $27.2 billion at the midpoint, or 10.3% below analyst estimates. Meta made a GAAP profit of $6.68 billion, down on its profit of $10.3 billion, in the same quarter last year.

Meta (META) Q2 FY2022 Highlights:

  • Revenue: $28.8 billion vs analyst estimates of $28.9 billion (small miss)
  • EPS (GAAP): $2.46 misses by $0.09
  • Revenue guidance for Q3 2022 is $27.2 billion at the midpoint, below analyst estimates of $30.3 billion
  • Free cash flow of $4.45 billion, down 47.8% from previous quarter
  • Gross Margin (GAAP): 81.9%, in line with same quarter last year
  • Family Monthly Active People: 3.65 billion, up 140 million year on year

Famously founded by Mark Zuckerberg in his Harvard dorm, Meta Platforms (NASDAQ: META) operates a collection of the largest social networks in the world - Facebook, Instagram, WhatsApp, and Messenger, along with its metaverse focused Facebook Reality Labs.

The need for connection is foundational to human experience, and remains the driver of Meta’s mission - to connect the world. Through its platforms, users can connect, share, discover, and communicate with family and friends on just about any connected device. Its massive global aggregated audience of over 3 billion users spends over two hours per day on properties.

Meta’s innovative digital ad tools, massive scale, and demographic data have also transformed how businesses operate, allowing a much more granular targeted approach to interacting with customers. Its high return on investment (ROI) advertising tools have allowed millions of new small businesses to spring up by aggregating potential customers online which were previously dispersed to identify and profitably sell to. Meta’s product offerings to businesses have continued to evolve to include commerce and payment functionality, while continuing to create new ad formats and ways to interact.

The company changed its name to Meta Platforms in October 2021 to signal its increased emphasis on building a new computing platform that will evolve how Facebook connects people (and advertisers) from a place to share experiences to a place of shared experiences. They introduced a new product segment, Facebook Reality Labs, whose focus is to create immersive technologies (AR/VR) meant to provide new ways to socialize, work, shop, and game.

Businesses must meet their customers where they are, which over the past decade has come to mean on social networks. In 2020, users spent over 2.5 hours a day on social networks, a figure that has increased every year since measurement began. As a result, businesses continue to shift their advertising and marketing dollars online.

Meta Platforms competes with fellow social media advertising platforms like Google (NASDAQ: GOOGL), Snapchat (NYSE: SNAP), Twitter (NYSE: TWTR), and Pinterest (NASDAQ: PINS)

Sales Growth

Meta's revenue growth over the last three years has been strong, averaging 25% annually. The initial impact of the pandemic was positive for Meta's revenue, pulling forward sales, but quarterly revenue subsequently normalized, year over year.

Meta Total Revenue

This quarter, Meta reported a rather lacklustre 0.87% year on year revenue decline, missing analyst expectations.

Meta is guiding for revenue to decline next quarter 6.06% year on year to $27.2 billion, a further deceleration on the 35.1% year-over-year decrease in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 10.1% over the next twelve months.

Usage Growth

As a social network, Meta can generate revenue growth by increasing user numbers, and by charging more for the ads each user is exposed to.

Over the last two years the number of Meta's monthly active users, a key usage metric for the company, grew 10.7% annually to 3.65 billion users. This is decent growth for a consumer internet company.

Meta Family Monthly Active People

In Q2 the company added 140 million monthly active users, translating to a 3.98% growth year on year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Meta it measures how much it makes off ads served to each user, proxy for how valuable advertisers find its audience and its ad-targeting capabilities.Meta ARPU

Meta’s ARPU growth has been decent over the last two years, averaging 14.6%. The ability to increase price while still growing its user base shows the value of Meta’s platform. This quarter, ARPU shrank 4.67% year on year, settling in at $7.89 for each of the monthly active users.

User Acquisition Efficiency

Consumer internet businesses like Meta grow by a combination of product virality, paid advertisement and occasional incentives, unlike enterprise products that are typically sold by sales teams.

Meta is very efficient at acquiring new users, spending only 15.4% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency is indicative of a combination of scale and a highly differentiated product offering, which gives Meta the freedom to invest its resources into new growth initiatives while still maintaining optionality.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

Meta's EBITDA came in at $13.6 billion this quarter, which translated to a 47.4% margin. Over the last twelve months the company has been amongst the handful of the most profitable consumer internet business with EBITDA margins of 49%.

Meta Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Meta's free cash flow came in at $4.45 billion in Q2, down 47.7% year on year.

Meta Free Cash Flow

Meta has generated $35 billion in free cash flow over the last twelve months, an impressive 29.3% of revenues. This robust FCF margin is a result of Meta asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from Meta's Q2 Results

With a market capitalization of $445 billion, more than $40.4 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We struggled to find many strong positives in these results. On the other hand, it was less good to see that the revenue growth was quite weak and the revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Meta. The company currently trades at $148.4 per share.

Is Now The Time?

When considering Meta, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Meta is still a decent business. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last three years. On top of that, its impressive EBITDA margins show massive profitability of the business, and its user acquisition efficiency is best in class.

The market is certainly expecting long term growth from Meta given its EV/EBITDA ratio based on the next twelve months of 7.8x is higher than many other consumer internet companies. There are definitely things to like about Meta and there's no doubt it is a bit of a market darling, at least for some. But when considering the company against the backdrop of the consumer internet stock landscape, it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.

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