Wall Street is bracing for another rough quarter for Facebook-parent Meta Platforms.
Meta Platforms's first quarter 2022 financial results will be released after market close on Wednesday, April 27, 2022.
The company’s fourth quarter results, reported in early February, triggered a huge selloff in Meta’s shares. First-quarter guidance was well shy of Street estimates, and the company warned that Apple’s policy changes would slice $10 billion from 2022 revenue.
With the stock down 35% year to date, investors will look to see if the company's latest performance can reinvigorate interest in the stock.
Signs of broader slowing in the overall digital advertising sector—and continued fallout from Apple’s (ticker: AAPL) push to limit the tracking of iPhone user activity across apps and websites—don’t bode well for the social media giant.
The impact of iOS on revenue
Meta's decelerating top-line growth in the company's most recent quarter and management's guidance for a further slowdown in Q1 has been the main reason for the stock's sharp decline as of late. After reporting impressive year-over-year revenue growth of 35% in the third quarter of 2021, fourth-quarter revenue growth slowed to a rate of just 20%. Even more concerning, management guided for revenue in the first quarter of 2021 to increase just 3% to 11%, compared to the year-ago quarter.
What was the main reason for this sudden slowdown in growth? Recent changes to ad tracking and measurement on Apple's iOS mobile-operating system. Privacy-focused changes on iOS have made it more difficult for Meta to implement targeting and measurement on the platform.
Fortunately, Meta management seemed optimistic about eventually working through these issues. But Meta said it could take several years to do so.
Investors, however, should note that Meta is notoriously conservative about its guidance. In other words, revenue growth usually comes in ahead of management's outlook. To this end, the social network giant will likely grow its revenue by at least 11% year over year in Q1. But there are no guarantees.
Whatever growth rate the company reports, it will likely give investors a window into how well the company is managing the challenges presented by iOS.
Competition
Video-sharing app TikTok's advertisement revenue is likely to triple in 2022 to more than $11 billion, exceeding the combined sales of its rivals Twitter and Snap, according to research firm Insider Intelligence.
Social media firms like Meta Platforms‘ Facebook and Instagram are still reeling amid the rapid rise of TikTok. Analysts at BofA Global Research says the short-form video app trailblazer is reshaping the online media landscape.
BofA Global Research analysts Justin Post and Nitin Bansal wrote in a note on Monday a TikTok user spends 90 minutes a day on average, pointing to estimates from third-party data firm SensorTower.
Guidance
Equally as important as Facebook's first-quarter revenue will be the tech-company's outlook for Q2.
Investors shouldn't get too excited about the potential for stronger revenue guidance for Q2. Management warned in Meta's most recent earnings call that it's lapping tough year-ago comparisons in the first half of the year. This is especially true in Q2 2022. Revenue grew 56% in its year-ago comp as marketers started ramping up their ad spend again after limiting it during lockdowns.
It's tough to forecast what Meta will guide for in Q2, but investors should plan for the worst until they have more information. An extremely tough comp, combined with potentially prolonged issues with iOS, could mean Q2 growth isn't any better than Q1.
Overall, there's a lot of uncertainty associated with Meta right now. That's why the company's first-quarter report will be particularly interesting, providing timely insight for investors.
Analyst views
Analysts at both RBC Capital and Oppenheimer trimmed estimates for Meta’s (FB) first-quarter earnings report, due after the close on April 27. RBC analyst Brad Erickson reduced his price target on Meta to $240 from $245, but maintained an Outperform rating on the stock. He fears results will again disappoint the Street.
Erickson cut estimates after a round of channel checks with ad agencies serving small- and medium-size businesses increased his conviction that Meta will report “another rocky quarter,” he writes.
The analyst found no perceived improvement in the company’s ad targeting or performance.
“Digital ad spend decisions remain in flux with many SMBs considering new channels away from Facebook for the first time,” he writes. “We’d expect some reversion at some point given Facebook’s audience size and relative scaled conversion advantage …but we see that narrative as unlikely to materialize near-term.”
The RBC analyst says some advertisers have trimmed spending on Facebook, and shifted dollars to Google, TikTok, LinkedIn, and online influencers. He also notes headwinds for online advertising from more cautious spending in Europe, because of nervousness about Ukraine war. Erickson remains bullish long-term on Meta shares, but finds a turnaround in advertiser sentiment unlikely any time soon.
Oppenheimer analyst Jason Helfstein likewise maintains his Outperform rating on Meta shares, but chopped his target price to $305 from $375. After attending a recent conference on digital media buying, he concludes that ad targeting on Facebook and Instagram hasn’t improved, and that some advertisers have shifted dollars to search and other ad platforms, he writes.
Helfstein expects near-term results to be muted by a combination of the Russia-Ukraine situation, a weaker European economy, and continued headwinds from the Apple ad situation. Meta is no longer accepting ads from Russian advertisers—1.5% of 2021 ad revenue—while a quarter of overall ad revenue comes from Europe, he notes. Helfstein trimmed his revenue estimates for Meta by 9% for both 2022 and 2023.
MKM Partners analyst Rohit Kulkarni, in a broad preview of the coming earnings season for internet stocks, warns that the entire group continues to be buffeted by a broad range of macro issues—including Russia, inflation, rising interest rates, and the continued pandemic. In particular, he worries that the war will produce lingering effects on the economy in Europe.
“While Internet stocks have bounced back 15% since the mid-March market trough, we believe a prolonged conflict in Ukraine could spill over to the Q2 Europe outlook,” he warns. “In such a scenario, we believe the near-term outlook for companies with high exposure to Europe and European consumers is more likely at risk.”
Another concern the analyst highlights is the potential impact of higher interest rates on ad spend by companies in rate-sensitive segments like autos and real estate. His advice: Stick to stocks with low European exposure, minimal reliance on the global supply chain, historically high gross margins, and low impact from higher interest rates. In particular, he calls out the ride-sharing company Lyft (LYFT) and social media play Snap (SNAP) as fitting that description, along with U.S.-based ad tech companies like Pubmatic (PUBM) and Integral Ad Science (IAS).
The revenue of Meta in Q1 of 2022 is expected to be $28.291 billion, the adjusted net profit is expected to be $7.49 billion and the adjusted EPS is expected to be $3.093, according to the unanimous expectation of Bloomberg.
Comments