“A first-ever year-on-year drop in sales, a third consecutive year-on-year drop in profits and forecasts from management which suggest there may be worse to come all leave Meta Platforms struggling to stem a year-long share price slide,” says AJ Bell Investment Director Russ Mould. “A weakening advertising market, loss of share to Google and TikTok and ongoing regulatory pressure are all putting on the squeeze and Meta is responding by cutting back on hiring and spending plans – just the sort of stuff upon which economic slowdowns or even recessions are made.
“Through Facebook, WhatsApp and Instagram, Meta’s business model was perfectly-adapted to helping people cope with the isolation of the pandemic and lockdowns, but management seems to have assumed that the good times would roll for ever.
“In the second quarter, operating expenses rose by 35% year-on-year and headcount rose by a third.
Source: Company accounts
“But revenues fell 1%, as user growth remained modest, advertising income weakened, and the competition took share of market. As a result, operating and net profit fell by one third between April and June, compared to the same period a year ago. That was the third straight year-on-year drop in net profit and earnings per share.
Source: Company accounts
“Management’s suggestion that sales will drop by around 6.5% year-on-year in the third quarter does not point to a rapid rebound, even if consensus earnings estimates for Q3 before the release of the second-quarter numbers had been looking for earnings per share of $3.22. Meta published $2.46 for the second quarter.
Source: Company accounts, mid-point of management guidance for Q3 2022E
“This all helps to explain why shares in Meta have more than halved from the $382 high reached in early autumn of 2021. That swoon has wiped out more than $600 billion of stock market value.
“Meta is responding to this profit and share price mauling. It is reining in hiring plans and trimming back operating expense budgets by around 5%, based on the mid-point of management guidance, for 2022. Additions to office space at Astor Place and Hudson Yards in Manhattan are reportedly on hold.
“That sort of activity – or lack of it – will make economists and central bankers shudder. If even the largest, well-resourced, highly profitable firms are cutting back, it does make you wonder what smaller companies who are even more susceptible to a profit squeeze will be thinking and doing.
“Meta Platforms still made $6.6 billion in after tax profit between April and June and it ended the quarter with $40.6 billion of cash and liquid assets at hand (although it did also have lease commitments of $16 billion and the Q1 regulatory filing revealed $22.7 billion in contractually committed future spending and investment).
“The company is not turning off the investment taps altogether. Far from it. The company is still looking to develop new revenue streams and the Reality Labs arm, which covers augmented and virtual reality (AR and VR) hardware and software generated $1.1 billion in revenues in the first half of 2022. However, that represented just 2% of group sales and the unit’s operating loss ballooned to $5.8 billion, up from $4.2 billion in the first six months of 2021, so it looks like a return on that investment is some way off.”
