Meta Platforms (META -2.07%) is having a disappointing 2022: shares of the tech giant have crashed 45% since the start of the year, triggered by tepid guidance the company issued in February.
The signs of a slowdown in Meta's growth caused investors to press the panic button at the beginning of the year, and the stock has failed to recover since. What should investors expect when the Facebook parent company releases its first quarter results on April 27: Should they prepare for another bloodbath in the stock market and exit their long positions or scoop up Meta stock now in anticipation of stronger-than-expected results over the long run? Let's take a look to find out.
Reasons to sell Meta Platforms ahead of earnings
Wall Street expects Meta to report $28.2 billion in revenue for the first quarter, which would be an increase of 7.7% over last year's first quarter figure of $26.2 billion. These estimates are in line with Meta's top-line guidance of $27 billion to $29 billion.
In spite of this progress, analysts expect earnings per to share (EPS) to shrink to $2.56, down from $3.30 in the year-ago period. Analysts expect annual EPS to drop as well, down to $12.31 in comparison to last year's $13.77. The drop in Meta's EPS can be attributed to a few factors. Firstly, Meta is witnessing a shift in user engagement toward video-related properties such as Instagram Reels, which carry lower monetization than Feeds and Stories.
Also, macroeconomic factors like supply chain challenges, and rising input costs are expected to hurt advertising, which is a key tenet of the social media giant's business model. Equity research firm MKM Partners predicts that soft consumer spending caused by higher oil prices and inflation will lead to a reduction in advertising budgets. In the U.S. alone, ad spending is expected to fall between 9% and 11% in the first half of 2022.
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Privacy changes recently made by Apple (AAPL 1.19%) to its iOS operating system will be another headwind for Meta throughout the year. Data management company Lotame estimates that Apple's decision to introduce an anti-tracking feature in iOS applications will cost Meta nearly $13 billion in revenue this year, which is much higher than the earlier forecast of a $10 billion revenue loss.
Reasons to buy
Immediate headwinds make buying Meta stock a risky proposition right now, but savvy investors looking to take advantage of long-term growth in digital ad spending and emerging tech trends such as the metaverse may want to accumulate the social media giant's shares while they are still cheap.
Meta stock is currently trading at just 13.4 times earnings, well below its five-year average earnings multiple of 29 and the S&P 500's earnings multiple of 25. Analysts expect revenue to increase by nearly 17% in 2023, so accumulating Meta stock at today's valuation could be a bargain buy.
While ad spending is currently down due to the macroeconomic factors mentioned above, digital advertising looks to be on a long-term growth path. According to eMarketer, digital advertising is expected to generate $785 billion in revenue in 2025, compared to $491 billion last year. Meta's solid share of this market positions the company well to take advantage of secular growth in this space.
Meta Platforms is also taking steps to monetize the metaverse, a three-dimensional virtual platform where people can interact with others across the globe through their virtual avatars. JPMorgan (JPM -0.54%) estimates that the metaverse could open a $1 trillion annual revenue opportunity for its participants -- one which could turn out to be another important catalyst for Meta.
Of course, investors need to remember that Meta Platforms' growth drivers are long term in nature, and these exciting trends still don't change the fact that the company is facing a challenging near-term scenario. That's why investors looking to buy this tech stock at its current enticing valuation will have to remain patient while potential catalysts play out.
