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The stock is up nearly triple digits in 2023
- On an annualized basis, revenue and monthly active users (Mau) are
expected to go down
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Company continues to ramp up losses in its AI division
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Is the stock up for a major correction?
Wallstreet darlings Meta reported earnings last week; shares are up 14%
since the announcement, cheered on the back of consensus beats in both top
and bottom line, along with an overly optimistic picture about its near
future combined with lower headcount – labeled as the year of the
“efficiency” in combination with more AI hype that is aimed at elevating
the company towards its bright future.
However, its recent performance pales in comparison to the stocks’
jaw-dropping 98.8% return since the start of the year, outrunning by miles,
in the same manner that Usain Bolt did to his competitors, indices such as
the NASDAQ 100 and S&P 500, which recorded only 19.87% and 7.29%
returns for the same period, respectively.
Many market commentators outweighed the positive portion of META’s
quarterly results at the expense of the negative side, preventing existing
and potential investors from forming a well-rounded, educated decision
about the company’s future. Namely that:
· Declining revenues which are a product of falling revenue per user along
with MaU quite likely reaching a ceiling and a potential decline from here
on
· Company’s Flop on AI, which not only bleeds billion, but even FB’s
programmers have no interest in
Let’s zoom out the bigger picture for Meta; if we annualize its latest
quarterly result, the company will continue with its declining revenues and
reach $114.58 bn of sales in 2023, down from an all-time high peak of
$117.9 bn in 2021, on the back of pulled-forward turnover as most of its
users consumed unimaginable quantities of online content, during the
covid-19 pandemic. That caused the average revenue per user (ARPU) to
skyrocket. However, that period proved to be short-lived. The company’s
earnings have entered the “decline phase” after years of expansion.
The covid period distorted the picture for META, which thought that the
past growth would translate into the future. There was a big spike during
the pandemic, but things started to normalize in the post-lockdown period.
In the post-pandemic period, people are no longer locked in. They chose to
experience life, unsurprisingly. As a result, user growth has reached a
wall. Monthly active users are incrementally growing, unable to break the
magical barrier of 3 billion or a whopping 38% of the world population!
Zuckerberg’s company reached a staggering +32% YoY growth rate in its ARPU,
a considerable spike thanks to the Covid-19 pandemic, which turned out to
be unsustainable.
Similarly, to the revenue timeline, the company ARPU is contracting after
growing every year since its IPO in 2008, as it was down 3% in 2022 and is
expected to mirror that performance in 2023, as people spend less time on
the social media platform.
The AI flop, also known as “Reality Labs” or how the “Metaverse,” is not
playing out as expected and is bleeding investors’ money. According to some
reports, Meta has invested over $100 bn on metaverse research and
development to date, $15 bn in the past year alone – with apparently little
to show for it. Zuckerberg’s newfound metaverse obsession could be seen as
a preemptive virtual land grabs for what is generally agreed to be the
future of the internet.
The irony here is so great that not even META’s employees are using it
– an internal company memo reported by Time.com said:
“The simple truth is, if we don’t love it, how can we expect our users to
love it?”
If the metaverse does not work, “cutting corners,” also known as
“efficiencies,” will.
Pre-pandemic, especially the pandemic period, brought unusually high demand
for META’s products, but that growth rate was not sustainable in the
post-pandemic world.
The company has drastically lowered its headcount to please shareholders
and reduced its swollen operating expenses, mainly from a spike in its
headcount, to protect its dropping profitability margins from further
contractions.
Despite all the bearish comments, the company does not look expensive on a
relative basis, which trades at nearly 20x the next twelve months’
earnings.
However, to justify that growth premium, the company needs to deliver and
possibly scrap its AI division altogether. The recently falling P/E
multiple reflects that investors are somewhat skeptical about the company’s
future growth prospects, and as the growth narrative turns south, the next
in line to fall might be its price.
Remember, price is what you pay, but value is what you get, and the market
is only sometimes very efficient at equating the two variables.
