By Senad Karaahmetovic
Shares of Meta Platforms (NASDAQ:META) are down 20% in pre-market Thursday after the social media giant delivered a big EPS miss and issued disappointing revenue guidance.
Meta reported an EPS of $1.64 on revenue of $27.71 billion. This compares to the FactSet consensus of EPS of $1.93 on sales of $27.57 billion. Overall, revenue fell 4% with the Facebook parent blaming FX headwinds.
Moreover, higher-than-expected costs weighed on Meta’s Q3 profit. Costs and expenses were reported at $22.05 billion, an increase of 19% year-over-year. The total number of employees rose 28% year-over-year to 87,314. Meta said it expects its 2023 headcount to be somewhere in-line with the Q3 headcount.
Facebook daily active users (DAUs) came in at 1.98 billion, beating the 1.86 billion consensus while monthly active users (MAUs) were reported at 2.96 billion, lower than the 2.97 billion estimate.
Reality Labs, Meta’s division that produces virtual reality (VR) and augmented reality (AR) hardware and software, had an operating loss of $3.67 billion, higher than the average analyst estimate that called for a $3.09 billion loss.
"While we face near-term challenges on revenue, the fundamentals are there for a return to stronger revenue growth. We're approaching 2023 with a focus on prioritization and efficiency that will help us navigate the current environment and emerge an even stronger company," commented Mark Zuckerberg, Meta founder and CEO.
"Beyond 2023, we expect to pace Reality Labs investments such that we can achieve our goal of growing overall company operating income in the long run," Meta stated.
For this quarter, Meta expects to see its revenue come in the range of $30 billion to $32.5 billion with the midpoint missing the $32.2 billion consensus. On a full-year basis, Meta said it expects to record total expenses between $85 billion and $87 billion, slightly above the $85.11 billion consensus.
Capex consensus was sitting at $30.5 billion while Meta said it expects to spend between $32 billion and $33 billion. The company stated that its high investments in AI capacity are driving capex growth in 2023.
Following the Q3 earnings report, at least two analysts downgraded Meta stock. Morgan Stanley analysts moved to Equal Weight from Overweight and cut the price target by nearly 50% to $105 per share.
“We see META's $69bn of capex over 2 years and AI-driven data center build as a sign of structurally higher capital intensity. While these investments could make META stronger over 5 years, we see '23 FCF heading 60% lower and higher risk to prove ROIC and incremental growth,” they wrote in a client note.
KeyBanc analysts also went to the sidelines. They lowered 2023/2024 EPS estimates by 28% and 29%, respectively, to reflect “meaningfully higher” opex and capex forecasts for 2023.
The downgrade is based on three key reasons:
- Data center investments limit ability to pull back opex;
- Family of Apps (FoA) margins are likely to stay in the low-to-mid-30% range given higher operating costs; and
- FCF generation is limited for 2023E/2024E.
Finally, Cowen analysts slashed the rating to Market Perform from Outperform on a higher cost trajectory.
“We downgrade META to Market Perform on much higher than expected opex and capex trajectory given investments in i) AI capacity to drive L-T competitive advantage in core products (Feed, Reels, Ads Biz); ii) Data center build out; and iii) Metaverse initiatives, as losses should expand significantly in '23. We cut '22-'27 ests, PT to $135 from $205,” they wrote in a client note.