Meta Platforms (NASDAQ: META) rocketed by a staggering 20% after the market as investors turned optimistic about the outlook for the tech giant after the earnings report beat estimates and the company further announced a whopping $40Bn increase in their share buyback authorization.
Revenue of $32,17Bn beat estimates by $500 million, while EPS of $1,76 per share produced a hefty $0,48 miss. While revenue from the highly topical Reality Labs segment of $727 million also beat estimates, free cash flows generated more than halved compared to the same quarter of the previous year. With both positive and negative signals coming from their earnings release, the question begs whether Mark Zuckerberg’s statement that 2023 is “the year of efficiency” for Meta truly reflects the reality of the company’s financial position.
Technical
As expected, there is bullish momentum in the shares for Meta. After a 20% surge after-market on Wednesday, the share may reopen a possible estimated fair value of around $184. This could result in a continuation gap as investors confirm their confidence in the upward direction of the company going forward. Continuing from the opening could signal further upside and confidence in the stock. This coincides with trading at prices much higher than the 50-day moving average. However, it is possible for that gap to start fading as investors look closely at the earnings. This fade would bring the first resistance level at $170,41 into play. If that resistance does not offer support, further downside to the first estimated target prices of $156,95 and $135,64 and a further target price of $123,14 may be on the cards. These levels could be focal points for bullish investors if support holds for potential entry points.
Fundamental
In the days and weeks leading up to the earnings release, investors had concerns about Meta’s ability to grow revenue and cut back on excessive spending that has been eating into their margins. A particular area of focus was spending on the Reality Labs segment of the business, that is currently unprofitable. In the fourth quarter of 2022, the segment beat revenue estimates but still generated a loss of $4,3Bn which resulted in a total year segment loss of $13,7Bn. CEO Mark Zuckerberg is sticking with large spending volumes in this segment as he views the Metaverse as the future of the business. Expenses, in general, soared in 2022 as Meta continued to ramp up spending, resulting in a 22% year-on-year expenditure rise, accompanied by a revenue decline. However, there were signals that the business will be prioritizing spending cuts in 2023, including a large number of layoffs. The outlook for expenses in the next year has been revised from $94M – $100M to $89M-$95M, which sat well with investors. The other concern investors had was revenue numbers that continued falling. Even though revenue beat estimates, it came to 4% lower than the previous year. This was partly due to foreign exchange headwinds likely to subside in the upcoming year. To improve revenue, the focus has been on monetizing certain business areas, including reels. However, this part of their business is monetizing at a different pace than other areas like their feeds and stories, resulting in a displacement in their revenue which puts a strain on their cash flow generating ability. The company is, however, focusing on improving its advertising revenue, with its ad impressions improving in the fourth quarter. However, revenue in the advertising segment was lower than in the fourth quarter of 2021 as they have been generating lower revenues per ad, with macroeconomic headwinds hindering their ability to charge more per ad.
One headwind their advertising revenue has faced is Apple’s upgrade to their iOS system’s privacy, which made it increasingly more difficult for Meta to target users with ads. They are, however, developing AI technologies to overcome this problem and break free of that revenue headwind. Furthermore, their daily active users increased 5% year on year to 2,96Bn, putting investors worried that focus was turning away from their thriving social media platform towards their struggling Reality Labs at ease. Another contributor to investors jumping on the buying train was that Meta announced a $ 40B increase in their share buyback authorization, signalling that shares could potentially be undervalued in management’s eye and confirming their confidence in the growth prospects for Meta going forward. With an expectation of cost cuts next year, along with an improved focus on the efficiency of their current offerings to improve revenue, investor sentiment turned positive. It may be worthwhile to see whether these improvements turn over into a more profitable bottom line in the quarter ahead.
Summary
With management addressing the areas of concern that investors had, hinting at cost cuts and an extensive share buyback program, Meta’s stock surged 20% after-market and could open at a price close to the $184 fair value. Suppose that gap fades during Thursday trading hours. In that case, potential buying opportunities could open up for the bulls at the $170,41, $156,95 and $135,64 resistance levels with an eventual $183,99 target price in mind if the fundamentals hold and the company’s vision plays out.
Sources: Koyfin, Tradingview, Meta Platforms, Inc.
