Investors in Meta Platforms (META -1.48%), formerly Facebook, are having a tough time lately. After reaching its all-time high just a few months ago, Meta's share price fell more than 45% to $208 (as of this writing). Slower revenue growth in the fourth quarter of 2021 and weak guidance for the first quarter of 2022 drove the sell-off.
On April 27, Meta announced its first-quarter results for 2022. Revenue rose 7% year over year, hitting the middle of its guidance of 3% to 11% growth. Let's look deeper into the earnings release for clues on what to expect in the coming months.
A challenging quarter for Meta
The first quarter of 2022 has been an unusual one for Meta. Following years of high double-digit revenue growth, the tech company grew revenue by only 7%. Moreover, as revenue growth declined, costs continued to rise at a high rate of 31% year over year. Consequently, operating income and net income fell by 25% and 21%, respectively.
Operationally, daily active users across all of Meta's services hit 2.87 billion, up 6% compared to last year. While ad impressions increased by 15% in the quarter -- thanks to growth in the Asia-Pacific and other regions of the world -- the average price per ad decreased by 8%, driven by a changing mix of ad impressions toward regions with a lower monetization rate.
The change in advertising mix also resulted in a decline in average revenue per user in the quarter by $0.03 to $7.72.
Overall, the latest result is alien to investors accustomed to the consistent growth in the top and bottom lines. Moreover, management guided second-quarter revenue to be between $28 billion and $30 billion. For perspective, revenue was $29 billion in the same period last year. So at best, it expects 3% growth; at worst, it will be a 3% contraction!
What to expect from Meta in the coming months
Meta's recent struggles are nothing new, driven by factors such as the change in Apple's iOS policy and the impact of short-video platforms (such as TikTok) that compete for user time. To add salt to the wound, recent macro headwinds like softness in e-commerce-driven activity during the economic reopening and the war in Ukraine have also impacted advertisement income. In particular, Russia has blocked Meta's services while the latter has stopped accepting ads from Russian advertisers globally.
While some of the problems mentioned above seem temporary, others require addressing from a longer-term perspective. And it's impossible to predict the duration of headwinds from the war.
For example, competition from short-video services will require a long-term plan to reposition the company's services. To this end, Meta is investing heavily to stay relevant to its users. For example, it launched its own short video service, Reels, which already makes up more than 20% of time spent on its Instagram platform. Video as a whole already makes up 50% of the time people spend on Facebook, and Reels is also expanding quickly there.
Management faces enormous challenges. While we still do not know whether strategies such as Reels can guide Meta out of its problems, the next few months will be rough for the company, as evidenced by management's guidance. As such, investors should not expect a quick turnaround.
A quick look at Meta's valuation
Meta's recent decline in share price has been severe, yet understandable. With many problems to tackle, the tech company is not the easiest investment choice for most investors.
The stock's valuation demonstrates investors' pessimism. Its price-to-earnings (P/E) ratio fell to around 16, much lower than its five-year average P/E of 29. And since the company is not expecting to regain its previous glory anytime soon (if ever), there is a chance that valuation will remain at the current level or fall further.
Yet investors who are confident in Meta's long-term prospects might find its current valuation highly attractive. But they will need a lot of patience while the management team tries to steer the company out of the storm.