Meta Platforms' (META -4.13%) stock surged 18% on April 28 after the tech giant posted its first-quarter earnings report.
Its revenue rose 7% year-over-year to $27.91 billion, which missed analysts' estimates by $310 million but matched its prior forecast for 3% to 11% growth. Its net income declined 21% to $7.47 billion, or $2.72 per share, but still exceeded analysts' expectations by $0.17.
Meta's report was mixed, but investors had already tempered their expectations after the release of its messy fourth-quarter report in February. Even after its latest post-earnings pop, its stock remains down nearly 40% for the year.
Let's see why investors breathed a sigh of relief after Meta's latest earnings report -- and if it's worth buying again as a turnaround play.
Image source: Meta Platforms.
Why did Meta's stock crash this year?
Meta's stock crashed this year for four main reasons: Facebook lost daily active users (DAUs) for the first time ever in the fourth quarter, Apple's (AAPL -1.22%) privacy changes on iOS throttled its ad sales, it admitted that ByteDance's TikTok was becoming a major competitor, and it committed itself to pouring more cash into its unprofitable Reality Labs unit.
That mix of slowing growth and rising expenses rattled investors, and higher interest rates exacerbated the pain by driving investors away from tech stocks. Therefore, investors were already bracing for a disastrous first quarter.
Did Meta fix its biggest problems?
Meta's total monthly active people (MAP) across its entire family of apps (Facebook, Messenger, Instagram, and WhatsApp) grew 6% year-over-year to 3.64 billion in the first quarter. That family's daily active people (DAP) also increased 6% to 2.87 billion on average throughout March.
But more importantly, Facebook's daily active users (DAUs) rose 4% year-over-year and 2% sequentially to 1.96 billion, shutting down the bearish notion that its core social network was running of room to grow. Facebook also gained DAUs across all of its regions except for Europe, which lost two million DAUs sequentially after Russia blocked its services in early March.
Meta's total ad impressions across its family of apps increased 15% year-over-year, but its average price per ad fell 8%. CFO Dave Wehner mainly attributed that decline to "factors related to the war in Ukraine" during the conference call, but CEO Mark Zuckerberg also said Apple's privacy update was still generating a "meaningful headwind" by causing a "signal loss" for its targeted ads. However, Zuckerberg still believes Meta can overcome those challenges "over time" with the "right technology" and investments.
As for TikTok, which is becoming a formidable competitor in the short video market, Zuckerberg said Meta's investments in fresh video content for Facebook and Instagram Reels were paying off. He said Reels now accounts for "more than 20%" of the time spent on Instagram, and that videos account for "50% of the time that people spend on Facebook."
However, Meta's Reality Labs business remained deep in the red as it ramped up its spending on its VR headsets and "metaverse" ecosystem. The segment's revenue rose 30% year-over-year to $695 million, but its operating loss widened from $1.83 billion to $2.96 billion. That wider loss, along with Meta's shift toward videos (which are tougher to monetize), caused its operating margin to decline 12 percentage points to 31%.
Its growth won't accelerate anytime soon
Meta expects to generate $28 billion to $30 billion in revenue in the second quarter, which would translate to a 4% decline to 3% growth from a year earlier. Analysts had expected nearly 6% growth.
Wehner also expects unfavorable foreign exchange rates to generate an additional 3% headwind for Meta's year-over-year revenue growth during the second quarter, and for Facebook's monthly active users (MAUs) to be "flat to down sequentially" as it continues to lose users in Europe.
Analysts expect Meta's revenue to rise 11% for the full year, and for its earnings to decline 11% as it ramps up its spending.
That outlook is messy, but Meta notably reduced its forecast for total expenses this year to $87 billion to $92 billion, compared to its prior outlook of $90 billion to $95 billion. It expects most of those expenses to go toward its Family of Apps instead of its Reality Labs business.
Is it the right time to invest in Meta?
Meta's stock looks historically cheap at 15 times forward earnings, but it's trading like a value stock because it still faces a lot of near-term challenges.
Facebook isn't dying, but it needs to stabilize its losses in Europe, overcome Apple's platform changes, and expand its video ecosystem to keep pace with TikTok. It's also unclear if its metaverse business can take off beyond its niche and gain more mainstream users. As it executes those costly strategies, the unpredictable macroeconomic headwinds could continue to disrupt the growth of its core advertising business.
I believe Meta's downside is limited at these levels. It still has plenty of irons in the fire, the stock is cheap, and its business should eventually stabilize. Investors can consider accumulating some shares of Meta right now, but they should temper their near-term expectations as it shifts gears and transforms its core businesses over the next few quarters.
