Meta Platforms to Report Earnings This Week: What to Expect?

This week’ we’ll get earnings from Apple, Amazon, Meta Platforms, and Alphabet. The earnings season for FAANG stocks began last week when Netflix released its second-quarter earnings.

The streaming giant’s earnings were better than expected and it lost fewer than 1 million subscribers in the quarter, which was below the 2 million subscriber loss that it had predicted in the previous earnings call. Netflix stock had crashed after the Q4 2021 and Q1 2022 earnings release but in a welcome break for investors, it saw upwards price action post the Q2 2022 earnings release.

FAANG earnings

Markets would now be closely watching the earnings of the other four FAANG stocks. Notably, both Alphabet and Meta Platforms stocks fell sharply on Friday after Snap issued a grim commentary on the ad industry’s health.

During the earnings call, Snap CFO Derek Anderson said, “We have seen a pretty good deceleration over the last 90 days.” He said that the company’s revenues so far in the third quarter are similar to the corresponding quarter last year.

Anderson added, added, “Specifically, advertising spending in particular, auction-driven direct response advertising is among the very few line items in a company’s cost structure that they can reduce immediately in response to pressure on their top line or their input costs. As a result, as many industries and verticals have come under top line or input cost pressure, advertising spending has been amongst the first areas impacted.”

Meta Platforms and Alphabet crashed

We see a good degree of correlation between social media and digital ad companies’ stocks. In May also, Meta Platforms and other social media stocks crashed when Snap said that it would miss its second-quarter guidance. Meta Platforms also posted dismal earnings in the fourth quarter of 2021 which led to a crash in all social media stocks. It also said that the new Apple iPhone rules would shave $10 billion from its 2021 earnings.

When Meta Platforms releases its earnings, markets would watch the management’s commentary on the online ad industry and if the tone turns out to be more bearish than expected we could see a sell-off in social media stocks.

Similarly, Apple’s earnings would offer insights into the discretionary spending in the US as well as the slowdown in China. Amazon’s earnings release would tell markets the state of consumption in the US markets.

Meta Platforms earnings estimates

Wall Street analysts expect Meta Platforms to report revenues of $28.9 billion in the second quarter, a YoY fall of 0.3%. Its adjusted EPS is expected to fall almost 30% to $2.56. Meanwhile, Wall Street analysts are mixed on Meta Platforms ahead of the second quarter earnings release. Earlier this month, Needham advised selling the stock.

“Near-term, we worry that consensus estimates are too high, based on Meta’s promises of higher investments in the Metaverse at the same time it is purposely slowing its revenue growth to better compete with TikTok,” said Needham analyst Laura Martin.

She added, “We worry that Meta’s enormous spending to create a new world called the Metaverse suggests it fears existential risks to its historical collection of businesses.” Notably, Meta Platforms has been spending billions on its metaverse business. While the business could be a significant long-term driver, in the short term it has been a drain on the company’s finances.

Needham advised investors to stay on the sidelines before Meta Platforms settles its metaverse business. The brokerage is also bearish on Netflix in the FAANG space and does not believes that the company can win the streaming war even with the ad-supported tier that is coming up early next year.

Hiring slowdown

When Big Tech companies report their earnings this week, markets would also watch out for commentary on their hiring plans. Alphabet has a two-week freeze on hiring while Meta Platforms has also gone slow on hiring. Reports suggest that even Apple has cut back on hiring amid the slowdown. Amazon had said previously only that it has started to cut its workforce which had surged during the pandemic. As the pandemic-induced growth has withered away, a lot of stay-at-home companies are witnessing a growth slowdown.

Meanwhile, it is not all gloom and doom for Meta Platforms and Morgan Stanley recently reiterated it and Alphabet as overweight. It said, “Our preferred pick in online ads over the next 12 months is (our $280 PT has ~70% upside). First, from a macro perspective, we see less revision risk than other names (as estimates have been cut due to Reels issues). … . We see ~25% upside to, but the tactical challenge is we don’t think there is much micro level investor tension.”

Famed investor Mohnish Pabrai also believes that Meta Platforms could double over the next three years irrespective of how the metaverse plays out. Meta Platforms stock is down almost 50% in 2022 and is among the top S&P 500 losers.