profits halve due to slowing advertising and rising costs


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Third-quarter revenue fell 4% to $27.7 billion, with the vast majority of that revenue coming from lower ad revenue. The average price per ad fell 18% from last year.

On average, 2.93 billion people used the group’s platforms daily, including Facebook, Instagram and WhatsApp, representing a 4% increase from last year.

Total costs and expenses increased from $18.6 billion to $22.1 billion, largely reflecting higher research and development spending. As a result, operating profit fell 45.7% to $5.6 billion and earnings were well below market expectations.

In the last quarter, the group expects a total turnover of 30 to 32.5 billion dollars. Meta is also making significant changes to improve efficiency, this will include “an estimated additional $900 million in consolidation costs” to its desktop footprint.

Meta shares fell 19.7% in after-hours trading.

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Our point of view

Meta is in trouble. The market took a sledgehammer to Facebook’s owner valuation this year. Third quarter results showed a further slowdown in advertising demand and rising costs.

Ad revenue is the bread and butter of Meta. Unfortunately, its platforms don’t have as much influence on marketing teams as they should. It’s not the first time the social media giant has lagged behind, and it reflects the fact that competition is fierce, with young entrants like TikTok a serious contender. In these uncertain and difficult times, other big names are struggling because marketing teams are spending less when things are tough, but Meta’s inability to retain customer wallet share is concerning, and maintaining punters comes at the expense of price reduction. These days, a branded post on Facebook reaches about 2.2% of the page’s followers, which is not much.

Another big question mark from here is how the group will propel significant growth. Growing competition, iOS privacy changes, and the difficulty of monetizing video content are all headwinds keeping those revenue expectations muted.

The challenges ahead aren’t lost on management, and that’s where the big metaverse plans come in. Unfortunately, the deployment and adoption of the group’s virtual reality products got off to a slow start, despite the seemingly endless upward spiral of the research and development budget. This is problematic because Meta has no other revenue streams to fall back on, so as things stand, when advertisers turn off the tap, Meta’s revenue funnel dries up very quickly.

Additionally, we have yet to see Meta unleash the full potential of WhatsApp and Messenger in terms of ad revenue. The paths to further monetization are blurry.

Big names like Google and Meta have been accused of monopolizing their territory through unfettered acquisitions of smaller rivals. Now the FTC (Federal Trade Commission) is here to make sure that doesn’t happen again as big tech seeks to grab virtual real estate in the metaverse. This is another challenge for Meta’s growth ambitions.

There is an argument for saying that there must come a point where the valuation of Meta is attractive, where the upside potential outweighs the downside risks. But we advise caution – we need a clear plan to stop the rot – both in terms of short-term financial performance and longer-term strategy.

With the metaverse untested, keeping the advertising business healthy is vital. The group has deep pockets and an enviable trove of customer data, but it appears that hasn’t been enough to boost investor sentiment yet.

Facebook key figures

  • Forward price/earnings ratio: 12.5
  • Ten-year average price-to-earnings ratio: 29.6
  • Prospective dividend yield (next 12 months): 0.0%

All ratios are from Refinitiv. Remember that returns are variable and are not a reliable indicator of future income. Keep in mind that key numbers shouldn’t be considered alone – it’s important to understand the big picture.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated, estimates, including forward-looking returns, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Returns are variable and not guaranteed. Investments go up and down in value, so investors could suffer a loss.

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