Meta stock has been on a nice two-week rally since the Facebook parent hit bottom after missing second-quarter earnings estimates and issuing downbeat Q3 guidance. But the big picture for Meta Platforms (META) is only growing more concerning.
XFor years, despite some bumps in the road for Facebook, the broader currents were always favorable. As online advertising grew, Meta captured an outsized share of that growth. Now, online advertising is in a slump, as an economic slowdown exacerbates the end of a pandemic-fueled e-commerce boom. More troubling, Meta seems to have lost its edge. And it's not just TikTok that's catching up.
The Q2 earnings report highlighted four problems that were pretty well understood, including moderating growth in e-commerce. The other three problems are more specific to Meta Platforms and its industry: Apple's privacy change, by making it harder to effectively target online ads, has cut into ad pricing and jeopardized Meta's position as the 800-pound gorilla in display advertising. Competition from TikTok threatens to stymie user growth. And, as Meta fights to compete in short-form videos, it has undertaken a costly transition to a new advertising format.
Meta's Problems Multiply
But in just the past few weeks, more problems are becoming apparent. Within days of discussing its strategic plan to take on TikTok on the Q2 call, Meta backed away from that plan, at least to an extent, in the face of a backlash from Instagram users who aren't happy with the new direction.
One of Meta Platforms' strategies for adapting to Apple's privacy change is to bring e-commerce transactions within its own family of apps. That way Meta will gain enough knowledge about customers to enable targeted ads. But Amazon is beating Meta to the punch, fueling 18% growth in ad revenue last quarter.
Now Netflix and Disney+ are both shifting to a partially ad-supported business model, shielding only members who opt to pay a premium price from advertising. More ad-supported content, all else equal, would tend to lower the price Meta can charge per ad.
The latest potential worry for Meta is a longer-term one, Needham analyst Laura Martin wrote in an Aug. 8 note. She revealed that Apple, after diminishing the ability of Meta and others to target advertising, is now working on its own ad tech platform that should be hard to match in data quality and pricing power.
Meta Q2 Earnings
Meta earnings fell 32% vs. a year earlier to $2.46 a share. Revenue dipped 1% to $28.8 billion, the company's first year-over-year decline in revenue in its history.
That could be the start of a trend. For Q3, Meta Platforms expects revenue in the range of $26 billion to $28.5 billion, vs. year-ago sales of $29 billion.
Still, the bleeding might not be as bad as it seems on first look. That's because Meta is assuming a 6% hit to total revenue from the stronger dollar's hit to the dollar-based value of international sales. Without the exchange-rate impact, the implication is that sales would range from down 4.5% to up 4.5%.
The Meta earnings report suggests the Facebook parent is running as fast as it can, just to more or less stay in place. The company delivered 15% more ad impressions than a year ago. But the average price per ad fell 14%.
Meanwhile, Meta Platforms announced a further cut to spending as a prelude to possible layoffs. In its Q2 report, Meta scaled back total-year expenses to a range of $85-$88 billion, down from $87 billion-$92 billion in April and its original outlook of $90-$95 billion.
In Q2, Meta's Reality Labs division, focused on growing the metaverse via augmented- and virtual-reality headsets and software, lost $2.81 billion in the quarter on revenue of $452 million.
While the company name has changed, the metaverse is more virtual than reality for now, with nearly all revenue coming from Facebook and Instagram ad sales.
Meta's Family of Apps — including Facebook, Instagram, WhatsApp and more — had operating income of $11.16 billion on revenue of $28.37 billion.
Join IBD experts as they analyze leading stocks and key market trends on IBD Live
Apple Costs Meta $10 Billion
Facebook has been warning since late 2020 about the challenge created by Apple's privacy change. But the shift that began with the iOS 14.5 update in the spring of 2021 had a modest impact until Q4. Apple now requires apps downloaded through the App Store to let users opt in or out of tracking their activity across third-party sites. With the bulk of users opting out, Meta Platforms has lost the data needed to help businesses narrowly target advertising to consumers likely to have an interest in their products or services.
"We believe the impact of iOS overall as a headwind on our business in 2022 is on the order of $10 billion," CFO David Wehner said on Feb. 2.
Meta is working on changes to make its ad targeting more effective, despite the impact of privacy-related changes. The aim is to use artificial intelligence to predict consumer interest as a substitute for tracking user activity. Meta also hopes to replace the knowledge of user interests previously gained through tracking them across the internet with knowledge gained from growing its commerce efforts within Facebook, Instagram and WhatsApp.
While there's no quick fix, Meta's resources and demonstrated expertise in ad targeting suggests it's relatively well positioned to recover from Apple's hit over time.
Facebook's TikTok Problem
"We believe competitive services are negatively impacting growth, particularly with younger audiences," Wehner said in the Q4 earnings call. TikTok was the only competitor mentioned by name.
Daily active Facebook users rose to 1.968 billion in Q2 from 1.96 billion in Q2. U.S. daily active users rose to 197 million from 196 million.
However, the picture may be more mixed than the user increase suggests. Morgan Stanley analysts wrote in a recent report that time spent on Meta's family of apps fell 1% from a year ago. An even bigger 3% drop in time on Facebook was only partly offset by slight growth at Instagram.
A new Pew survey found that that only 2% of teens say they use Facebook "almost constantly," rising to 10% for Instagram. But that trails Snapchat (15%), TikTok (16%) and YouTube (19%).
Time The Market With IBD's ETF Market Strategy
Meta's Ad Transition
Trying to combat the TikTok threat and up its game with young adults has created another headwind to Meta's earnings power. Meta is now focused on driving user engagement via its Reels short-form video feature, yet there are "relatively few ads in Reels today," Wehner said on Feb. 2.
There's been some progress. Zuckerberg said on the Q2 call that ad revenue from Reels had reached a $1 billion annual run rate. However, Reels content still monetizes at a much lower rate than other Facebook content, such as Stories.
Nevertheless, Meta is doubling down on pushing short-form videos, as it tries to make headway against TikTok. On July 21, Meta said that Facebook users will henceforth be directed to a new "Home" entryway, where they will encounter curated content such as Reels videos. Posts from family and friends will be found by clicking on a new "Feeds" tab.
On the Q2 call, Zuckerberg said Meta will increasingly show Facebook and Instagram users Reels from people that they don't follow. Unsolicited content will roughly double from 15% to 30% through 2023.
Wehner said Meta is optimistic that, in the long run, increasing monetization of Reels content "will be a tailwind on revenue, but that's not happening in 2022."
Instagram Reels Backlash
But a potentially significant problem has already emerged with Meta's plan to boost the amount of time users spend on Facebook and Instagram by emphasizing short-form videos. It seems that users aren't necessarily on board with the plan.
Two of the biggest names on Instagram, Kylie Jenner and Kim Kardashian, launched a protest of sorts to "Make Instagram Instagram Again."
They wrote: "Stop trying to be TikTok. I just want to see cute photos of my friends. Sincerely, Everyone."
Instagram, in no position to alienate its highest-profile users, quickly raised a white flag. "We definitely need to take a big step back, regroup and figure out how we want to move forward," Instagram CEO Adam Mosseri told Platformer.
How that step back gibes with Meta Platforms' strategic plan isn't yet clear.
Meta Stock Analysis
After crashing 26% on Feb. 3, following its Q4 earnings report, Meta stock has made four rally attempts to its 50-day line. The first four failed. The fifth is currently in play. On Monday, Facebook stock edged up 0.2% to 180.89.
Meta stock has yet to break a downtrend lower highs and lower lows. That negative pattern has carried all the way since Sept. 1, when Meta hit an at all-time high of 384.33. A move above 183.85 would break the pattern.
Meta shares fell through their 50-day line on Sept. 20, offering a sell signal. That was two days ahead of the company's Sept. 22 blog post warning of a "greater impact" from Apple's recent iOS updates.
After sliding 5.2% on Thursday on July 28, in the wake of earnings, Facebook stock has been rallying. Meta's Relative Strength line, which tracks a stock's progress vs. the S&P 500, has come off a seven-year low at the end of July.
Meta stock may have stopped digging a deeper hole, but that's not reason enough to be bullish.
Facebook's Metamorphosis
Facebook's Oct. 28 name change to Meta Platforms made sense for multiple reasons. It's probably no coincidence that it happened as Facebook was being treated as a political pariah, alleged to profit from pushing politically divisive content and harming vulnerable teens. The name change also may have been a bid to get distance from Facebook's less-than-cool image among young people. "You won't need a Facebook account to use our other services," Zuckerberg said in introducing the Meta name.
But the Meta name also speaks to Zuckerberg's broader ambitions to lead social networking into the "next frontier."
That frontier will be three-dimensional, allowing for immersive experiences. "The defining quality of the metaverse will be a feeling of presence — like you are right there with another person or in another place," he wrote.
"Our hope is that within the next decade, the metaverse will reach a billion people, host hundreds of billions of dollars of digital commerce, and support jobs for millions of creators and developers."
Meta is expected to release a high-end virtual reality headset later this year that will be far more expensive than its top-selling Quest 2, which itself is now getting a price hike from $299 to $399.
One more key reason Zuckerberg wants to produce the hardware for that next frontier: He wants to help set the rules, rather than have the likes of Apple set standards. But Meta has slowed down spending on its reinvention amid slower growth.
Meta Is A Value Stock
So how does the outlook appear now for the former FANG stalwart, which officially changed its ticker to META from FB as of June 9?
Meta isn't exactly cheap, with a $486 billion valuation. But with the stock falling even more than earnings to this point, Meta has become a value stock. It has a price-earnings ratio of 15, vs. 20 for the average S&P 500 stock.
Plus, Meta is cutting billions in spending to support profitability while revenue remains stuck.
That suggests plenty of potential upside — if Meta can weather current challenges and begin to capitalize on its metaverse investments. Yet with so much uncertainty, investors should look for better opportunities and monitor Meta stock's chart for validation that the company has really turned the corner.
Meta Stock: Is It A Buy?
Meta management has compared its current transition to Reels monetization to earlier successful content transitions, like the shift to Stories and mobile. But this time is different. User growth has run out of steam amid growing competition, while privacy changes have undercut its display advertising dominance. At the same time, Meta is still spending a lot to position for metaverse potential that may not come to fruition for years. All that makes it harder to have faith in the strength of Meta's rebound, which will be postponed until recession clouds disperse.
Bottom line: Meta stock is not a buy.
Be sure to read IBD's after-the-close The Big Picture column each day to make sure growth investors have a green light.
Also, check out IBD Stock Lists and other IBD content to find dozens of the best stocks to buy or watch. If you want to invest in a large-cap stock, a comprehensive selection of articles is here. The IBD Big Cap 20 index offers a selection of the very best large-cap stocks.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of financial markets and economic policy.
YOU MIGHT ALSO LIKE:
Catch The Next Big Winning Stock With MarketSmith
Best Growth Stocks To Buy And Watch: See Updates To IBD Stock Lists
Looking For The Next Big Stock Market Winners? Start With These 3 Steps
See IBD Stock Lists & Get Pass/Fail Ratings For All Your Stocks With IBD Digital
