Social media conglomerate Meta Platforms (FB 3.77%) caused a stir when its 2021 Q4 earnings showed Facebook losing daily active users for the first time in its history.
NASDAQ: FB
Key Data Points
More than 3 billion people use its networks like Facebook and Instagram each month, which Meta monetizes by selling ads. Naturally, investors were focused on the company's 2022 Q1 earnings when they came out a few weeks ago, looking to see where the company might head next. Fortunately, Meta's still healthy, and investors are looking at a potential opportunity to buy shares on the cheap.
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Facebook user growth is back online
An advertiser's audience is its "golden goose," which made the idea that people may be permanently signing off of Meta's Facebook network troublesome. The company saw a minor downtick in daily active users (DAU) in 2021 Q4, shrinking to 1.929 billion users from 1.930 the prior quarter.
Fortunately, renewed DAU growth in 2022 Q1 should alleviate investor concerns; Facebook's DAU grew to 1.960 billion, a 4.36% year-over-year increase and 1.6% increase from the prior quarter.
Companywide DAU grew 6% year over year in 2022 Q1, and maintaining user growth can help drive revenue growth despite headwinds from Apple's iOS privacy changes.
iOS headaches continue
Meta has traditionally tracked user activity across their phones and devices; the fine print in user agreements that most people blindly accept when installing Facebook or Instagram authorizes this. However, Apple changed its iOS software in early 2021; a pop-up now appears that users must click through before an app can track user activity.
Many people don't like "being watched," so they often decline tracking when these pop-ups appear. This has made it more difficult for Meta to follow and gain insights from its users and harmed the efficiency of its ad businesses.
This was a big reason why Meta's revenue growth has hit a wall; after growing revenue between 40% and 60% per year over the past decade, revenue grew just 7% year over year in 2022 Q1. This is slower than even 2020, when COVID-19 dramatically impacted how much companies spent on ads.
FB Revenue (Quarterly YoY Growth) data by YCharts
This problem doesn't seem to be going away; management remarked on its earnings:
"We expect second quarter 2022 total revenue to be in the range of [$28 billion-$30 billion]. This outlook reflects a continuation of the trends impacting revenue growth in the first quarter"
The numbers back that up. Advertising volume was healthy in the quarter, with impressions growing 15% year over year in 2022 Q1. However, the price per ad, which is essentially how fruitful the ads are for Meta, decreased by 8%.
Investors should follow these trends moving forward. CEO Mark Zuckerberg has grown Meta into one of the world's most influential companies, and there's a good chance he figures out how to rectify this, but it's something investors probably want to see first-hand at this point.
Stock is still a bargain
Don't mistakenly assume that Meta Platforms' challenges have brought the company to its knees. Meta still generated a whopping $8.5 billion in free cash flow in 2022 Q1, roughly 30% of revenue in the quarter, something most companies can only dream of.
Meta's stock trades at a price-to-earnings ratio of just 15, while the S&P 500 trades at a P/E of 20! In other words, Meta trades at a 25% discount to the broader market while being a cash-generating machine and one of the world's most powerful companies.
Meta is also heavily investing in the metaverse via its Reality Labs segment. These investments arguably make the free cash flow Meta produces more impressive (since without that spending, free cash flow would otherwise be even higher). The company is using that cash to repurchase shares, which only further increases per-share profits.
Eventually, the market may realize that Meta deserves a higher valuation than it currently fetches. Of course, Mr. Market guarantees nothing, but few other companies0 produce so much cash profit, yet trade for lower valuations. Despite its near-term hurdles, Meta's earnings confirmed that the company is still alive and well.
