Meta announces Q3 results and investors rush to dump the stock

Facebook parent company Meta's Q3 results are out, and investors seem to lose confidence in the company due to declining revenue and profit, while the total expenses have gone higher than market expectations.

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Facebook parent company Meta Platforms Inc has forecast a sluggish holiday quarter and significantly higher loss from Metaverse investments for the year ahead. Consequently, the brutal stock market reacted against the share value of Meta which tanked 20 percent in the early trading hours after Meta’s Q3 results were announced on Wednesday.

The forecast has wiped out about $40 billion from the stock value of Meta during the extended trading. Alongside the depressing prospects, Meta is contending with slowing economic growth across the globe, competition from TikTok and concerns over the amount of expenditure on the Metaverse. Alongside this, the constant risk of regulation is another challenge Meta is fighting with at a different front.

During the third quarter which ended on September 30, the revenue of Meta, the Facebook parent company, dropped 4% YoY, to $27.7 billion, compared to $29 billion in the year-ago quarter.

The decline was exacerbated by a drop in revenue started in the previous quarter which saw the company post its first-ever drop in revenue by 0.9 percent. However, it was less severe than the 5.6 percent drop Wall Street had expected.

Meta also reported figures for user growth that are in line with expectations. The daily active users of its flagship app Facebook have reached an all-time high while both Instagram and Whatsapp have over 2 billion monthly active users now. The company also, first time ever, disclosed the number of Reels plays, claiming to be 140 billion across services each day. Overall, Facebook’s family of apps have 3.7 billion monthly active users.

Despite the growing numbers of active users, the biggest concern for Meta was the estimation for the next quarter. The company has forecasted the quarterly revenue for Q4 2022 in the range of $30 billion – $32.5 billion which is lower than the analysts’ expectations of $32.2 billion.

Meta has also projected that its total expenses for 2023 will be around $100 billion, which is more than the revised estimation for 2022’s total expenses of about $86 billion.

These expenses include the $2.9 billion in expenses in 2022-2023 related to “consolidating the footprint of our office facilities”.

Meta stated it is cutting the workforce in certain teams and is investing in headcount growth “only in our highest priority”.

The total cost for the third quarter also shot up, beating analysts’ expectations. It totalled $22.1 billion up from $18.6 billion during the same quarter in the previous year. Analysts had expected it to be around $206 billion.

The net income of Meta for the third quarter nosedived to $4.40 billion which is $1.64 per share, down from $9.19 billion in the year-ago quarter. This was the worst performance of the company since 2019, and the fourth consecutive quarter of declining profits.

“The worry for Meta is that this pain is likely to continue into 2023 as cost headwinds remain a real challenge and the strong dollar impacts on overseas earnings,” said Ben Barringer, equity research analyst at Quilter Cheviot.

Many experts believe that modest user growth and impressions become insignificant given revenue is tanking at a time when the cost is shooting up significantly.

Meta’s growth largely depends on ad revenue which accounts for nearly 98% of the company’s total revenue. This may become even more challenging in quarters to come as brands have started exploring options to squeeze their marketing budget due to the fear of the longest recession which is knocking on the doors. Meta is not the only company that has failed to perform as per the market expectations. On Tuesday, Google parent Alphabet missed estimates for quarterly revenue. In the past, Snap Inc, owner of the photo-messaging app Snapchat was able to see its shares plummet by 25 percent after it reported its lowest revenue growth since its public listing five years ago.

All of the above quarterly results are clear indicators of the upcoming tough quarters. For Meta, however, the situation is even more critical given its stock value has already down by more than 61% since the beginning of the year. As many market leaders, including Elon Musk, have openly warned companies to be prepared for the longer-than-expected recession, it would be interesting to see how Zukerberg plays his cards in months to come.

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