Investors were disappointed when Meta Platforms (META 0.04%), the company formerly known as Facebook, reported its first-ever annual revenue decline in 2022, , resulting in a sell-off that sent the company’s stock to a low of $88, down more than 60% from its 52-week high.
However, share prices have recovered, prompting speculation whether the company is finally out of trouble. To answer this question, let’s review Meta’s first-quarter 2023 earnings report for some clues.
Image source: Getty Images.
A quick overview of the advertising business
Once a solid growth machine, Meta’s advertising business faced some tough challenges lately when it reported a revenue decline of 4% and 1%, respectively, in the fourth quarter of 2022 and the whole year.
Meta blamed its weak performance on a challenging macro environment, Apple’s iOS policy change, and the impact of competition from TikTok. Investors hoped that these weak numbers were temporary and that the company could return to its glory days soon.
So far, Meta’s performance has been a mixed bag. For the first quarter of 2023, revenue came in just 4% higher, while operating income fell 2%.
On one hand, it’s good to see that revenue growing again for the Family of Apps (Facebook, Messenger, WhatsApp, and Instagram). Engagement levels improved, as daily active people (DAP) and Facebook daily active users (DAU) reached 3.02 billion and 2.04 billion, up 5% and 4%, respectively.
Yet, operating income fell 2% to $11.2 billion thanks to a $934 million restructuring charge in the quarter. Operating income would have improved if we excluded these one-off charges.
Overall, I think the advertising business — while demonstrating some good traction — still has a lot of work to do. At least, it needs to get back to sustainable revenue growth for a few more quarters before we can declare victory.
Meta remains heavily committed to the metaverse
Another significant concern that investors have is Meta’s massive bet on the metaverse.
It might seem perfectly sensible for Meta to invest heavily in this emerging industry, since JP Morgan reports it will be worth $1 trillion in yearly revenue. Still, despite all its promises, the metaverse is very far away from reaching the mainstream. It will take enormous investments across hardware, software, business models, and more before the industry gains traction.
Hence, investors are hoping that Meta might scale back its investment in this area, or at least postpone investment until it has better visibility. It is all the more important now that the advertising business also has problems to resolve. So far, however, investors will likely be disappointed.
As a start, Meta CEO Mark Zuckerberg — in the recent earnings call with analysts — reaffirmed his commitment and focus on the metaverse vision. On top of that, Meta’s Reality Labs reported a 35% increase in operating loss to $4 billion despite this segment’s revenue halving during the quarter.
In short, Meta probably won’t slow investments in the metaverse. If anything, the company will likely sustain or potentially increase its investment, leading to a higher cash burn. As for investors, they have little option but to hope that the metaverse project will be successful in the long run.
What’s next for the company?
Overall, it’s still too early to declare that Meta is out of the woods.
The turnaround for the advertising business will take at least a few more quarters, if not longer. On the positive side, Meta’s cost-cutting measures will likely result in a stronger financial position in coming quarters.
Whether the metaverse investment will create shareholder value in the long run remains to be seen. But we can be sure that the cash infusion from the advertising business will continue for the foreseeable future. Investors must accept that fact if they want to remain invested in the company.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, JPMorgan Chase, and Meta Platforms. The Motley Fool has a disclosure policy.
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