Is Meta going to drop another BOMB?

There are three problems Meta needs to address:

1. CAPEX

Even excluding large metaverse investment, Meta’s CAPEX is more than Apple, Tesla, Twitter, Snap, and Uber combined! (Source: Open Letter from Altimeter)

Meta is growing its CAPEX spending like there is no tomorrow:

When its revenue was boosted during COVID, investors gave a pass to the outrageous CAPEX.

Apple’s policy change made it much harder for small businesses to reach their target audience on Facebook and its family of apps and it continue to hold back Meta’s revenue growth.

The current rate hiking cycle created waves of layoffs in tech industry and SMBs have pulled back their spending on Ads. Macro headwind weighted heavily on Meta’s revenue. There are signs of stabilizing in Ad spending recently but SMBs continue to stay cautious.

3. $10B bet – Metaverse

Everyone has its own version of future metaverse and Zack’s vision does not resonate well with investors. Burning $10B/year on a future dream made investors highly skeptical about its future return and losing their faith in the management

So why has the stock been doing so well in the last three months, the answer is simple: Layoffs

Meta cut 13% of its total workforce in November 2022, which should save them $6-7B in expense on an annual basis. That translates to ~25% boost to net income. In the meantime, Meta’s forward P/E was also the lowest among FANNG stocks.

Meta is about to release its 2022 Q4 earnings on Feb. 1st, 2023, the same day as FOMC meeting. Is it going to drop another bomb to the market? Unlikely. In fact, according to Bloomberg consensus, 3 analysts revised UP their adj. EPS for Q4 in the past month, which is a sign of things are stabilizing at Meta for now. Note that investors will continue to push for clarities and answers of those three problems Meta is facing at the earnings call. Due to its recent strength in price movement and it’s technically overbought. A lot of optimism on earning should already be priced in ahead of the announcement.

Disclosure: The author does not own Meta at the time of this writing and this is not Financial advice.