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Wallstreet darlings Meta reported earnings last week; shares are up 14% since the announcement, cheered on the back of consensus beats in both top and bottom line, along with an overly optimistic picture about its near future combined with lower headcount – labeled as the year of the “efficiency” in combination with more AI hype that is aimed at elevating the company towards its bright future.
However, its recent performance pales in comparison to the stocks’ jaw-dropping 98.8% return since the start of the year, outrunning by miles, in the same manner that Usain Bolt did to his competitors, indices such as the NASDAQ 100 and S&P 500, which recorded only 19.87% and 7.29% returns for the same period, respectively.
Many market commentators outweighed the positive portion of META’s quarterly results at the expense of the negative side, preventing existing and potential investors from forming a well-rounded, educated decision about the company’s future. Namely that:
· Declining revenues which are a product of falling revenue per user along with MaU quite likely reaching a ceiling and a potential decline from here on
· Company’s Flop on AI, which not only bleeds billion, but even FB’s programmers have no interest in
Let’s zoom out the bigger picture for Meta; if we annualize its latest quarterly result, the company will continue with its declining revenues and reach $114.58 bn of sales in 2023, down from an all-time high peak of $117.9 bn in 2021, on the back of pulled-forward turnover as most of its users consumed unimaginable quantities of online content, during the covid-19 pandemic. That caused the average revenue per user (ARPU) to skyrocket. However, that period proved to be short-lived. The company’s earnings have entered the “decline phase” after years of expansion.
The covid period distorted the picture for META, which thought that the past growth would translate into the future. There was a big spike during the pandemic, but things started to normalize in the post-lockdown period.
In the post-pandemic period, people are no longer locked in. They chose to experience life, unsurprisingly. As a result, user growth has reached a wall. Monthly active users are incrementally growing, unable to break the magical barrier of 3 billion or a whopping 38% of the world population!
Zuckerberg’s company reached a staggering +32% YoY growth rate in its ARPU, a considerable spike thanks to the Covid-19 pandemic, which turned out to be unsustainable.
Similarly, to the revenue timeline, the company ARPU is contracting after growing every year since its IPO in 2008, as it was down 3% in 2022 and is expected to mirror that performance in 2023, as people spend less time on the social media platform.
The AI flop, also known as “Reality Labs” or how the “Metaverse,” is not playing out as expected and is bleeding investors’ money. According to some reports, Meta has invested over $100 bn on metaverse research and development to date, $15 bn in the past year alone – with apparently little to show for it. Zuckerberg’s newfound metaverse obsession could be seen as a preemptive virtual land grabs for what is generally agreed to be the future of the internet.
The irony here is so great that not even META’s employees are using it – an internal company memo reported by Time.com said: “The simple truth is, if we don’t love it, how can we expect our users to love it?”
If the metaverse does not work, “cutting corners,” also known as “efficiencies,” will.
Pre-pandemic, especially the pandemic period, brought unusually high demand for META’s products, but that growth rate was not sustainable in the post-pandemic world.
The company has drastically lowered its headcount to please shareholders and reduced its swollen operating expenses, mainly from a spike in its headcount, to protect its dropping profitability margins from further contractions.
Despite all the bearish comments, the company does not look expensive on a relative basis, which trades at nearly 20x the next twelve months’ earnings.
However, to justify that growth premium, the company needs to deliver and possibly scrap its AI division altogether. The recently falling P/E multiple reflects that investors are somewhat skeptical about the company’s future growth prospects, and as the growth narrative turns south, the next in line to fall might be its price.
Remember, price is what you pay, but value is what you get, and the market is only sometimes very efficient at equating the two variables.
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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