Facebook enters a storm of uncertainty, and the wrong kind of ‘firsts’ are showing up

Meta Platforms Inc. Has navigated rough patches before, but none like the one it current faces, as even Mark Zuckerberg has admitted.

In a coming-to-Jesus meeting with employees on June 30, Meta’s META,
-1.55%
co-founder and chief executive forewarned of one of the “worst downturns that we’ve seen in recent history” that will warrant a scaling back of hiring and allocation of resources. Meta has reduced its target for hiring engineers to about 6,000 to 7,000, down from an initial plan to hire about 10,000 new engineers, according to an audio recording of the weekly Q&A session obtained by Reuters.

Read more: Mark Zuckerberg issues dire economic warning to Meta employees

When the company reports earnings Wednesday, expect to see the wrong kind of “firsts”: Three months after reporting Facebook’s first-ever user decline, Meta is expected to report its first ever year-over-year drop in revenue along with a profit decline of more than 30%. And the challenges go deeper than that: Facebook must whack its way through a corrosive thicket of major macroeconomic headwinds, the threat from TikTok for user attention, and lowered ad effectiveness as a result of Apple Inc.’s AAPL,
-0.74%
privacy changes.

From three months ago: Facebook earnings were not as bad as feared, but they were still pretty bad

The TikTok threat is so real that executives have decided the Facebook app should act more like the Chinese-owned social media app, with a change in how users browse the service. The app will open to a new Home tab that features a feed with photos, looping videos and status updates, not all of which will be posted by users’ chosen “friends.”

Meta’s woes have been accelerated by a contraction in digital advertising sales caused by inflation, the war in Ukraine, supply-chain issues and — perhaps, most troubling — Apple Inc.’s AAPL,
-0.74%
change to privacy mobile settings that has battered Meta’s ability to collect consumer data. For an example of what this dangerous mix of headwinds can beget, you don’t have to look farther than what happened to rival Snap Inc. SNAP,
-0.10%
last week.

“We’d doubt much in the way of incremental Metaverse spending commentary but given the headwind it is creating, we think management would be well served to offer more specificity on where investments are going within the Metaverse initiatives as well as where cost cuts are coming out of between [metaverse] and the core business,” RBC Capital Markets analyst Brad Erickson said in a July 19 note.

Conversely, Credit Suisse analyst Stephen Ju sees potential for “better than-expected ad revenue growth on product innovation (Facebook Shops, Search in Marketplaces, etc.),” he said in a July 19 note with an outperform rating and price target of $245 .

“Street models are too conservative and underestimate the long-term monetization potential of other billion-user properties like Messenger and WhatsApp,” Ju wrote.

What to expect

Earnings: Analysts surveyed by FactSet on average expect Meta to report second-quarter earnings of $2.55 a share, down from $3.61 a share a year ago.

Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are also projecting earnings of $2.55 a share on average.

Revenue: Analysts on average expect Meta to report $28.92 billion in second-quarter revenue, down from $29.1 billion a year ago. Estimize contributors predict $28.92 billion on average.

Stock movement: Meta’s stock has tumbled 50% so far this year — among the worst Nasdaq-100 NDX,
-0.55%
performers — while the S&P 500 index SPX,
+0.13%
is down 17%. Shares of Meta are down 8% since the company last announced quarterly results.

What analysts are saying

Zuckerberg’s words of warning and hard pivot to the metaverse mark the latest dizzying narrative for a company already in the vice of regulatory scrutiny as well as roiled by the departures this year of several key executives that include Chief Operating Officer Sheryl Sandberg and Chief Revenue Officer David Fischer. The defections underscore Meta’s myriad challenges during an economic downturn that has muzzled ad spending, Apple’s restrictive policy, and in a climate of escalating competition short-form video services like TikTok.

“Meta is losing its grip on its massive audience. Its US user base for Facebook is barely growing, and while Instagram is helping to steady the ship, it too is starting to see softness in the important teen and young adult age groups,” Insider Intelligence analyst Debra Aho Williamson said last week. “Meanwhile, Meta’s metaverse initiatives are also losing some steam as the company is forced to pull back and focus on the fundamentals of its business.”

In slicing his price target to $275 from $300, Cowen analyst John Blackledge anticipates “macro headwinds, shifting engagement to short-form video which monetizes at a lower rate than Feed or Stories for the time being and continued iOS ATT change impact” will diminish Meta name sales.

And yet, the enduring appeal of Meta’s customer base of approximately 3 billion people and its steady ad revenue make it an attractive long-term investment, argue some. John Buckingham, editor of The Prudent Speculator newsletter, identified Meta as one of seven value stocks to buy now despite its operational risks.

“It dropped from $400 to $160, so we like it,” he said.

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