Meta Platforms Action: Q4 Earnings, Market Overreaction (NASDAQ: FB)

0

Drew Angerer/Getty Images News

Yesterday’s meta-platforms (NASDAQ:FB) released its fourth quarter and full year results. The stock fell 22% after hours as investors reacted to the results. The exit was a beat on revenue but a miss on revenue. Much of the lack of EPS was due to the massive increase in Metaverse spending over the period. While revenue jumped 20% for the quarter, costs jumped 38%, leading to lower year-over-year profits.

By the numbers, Wall Street overreacted to the release. Meta only missed EPS by 5%, and even managed a small hit on revenue. Prior to the release, analysts feared that Apple (NASDAQ:AAPL) app tracking changes would hold back company revenue. In fact, advertising revenue has increased significantly, although CFO Dave Wehner noted that the app tracking changes reduced sales compared to what they would have been otherwise. The fourth quarter miss was primarily due to increased Metaverse spending; EPS could have easily exceeded the estimates if the costs had been reduced.

Ahead of the fourth quarter earnings release, Meta was hit by a number of negative news. First, the media reported that the company’s products were harm the mental health of users. Then the FTC refiled its anti-trust lawsuit, which threatens to untie Instagram and WhatsApp. It was a tough quarter for the company, at least from an advertising standpoint. But as the Q4 release showed, Meta Platforms continues to grow. Revenue, daily users, and monthly users continue to grow and are expected to continue growing for the foreseeable future.

Considering all of these factors, FB’s after-hours liquidation can only be seen as a severe overreaction. Like I wrote in a recent tweetrevenues were very strong and EPS could have beaten if management had reduced their metaverse expenses.

FB didn’t miss fourth quarter earnings because of Apple, the FTC or any other hostile entity, but because of heavy investment in R&D. It could actually be bullish in the long run, if Zuckerberg and co play their cards right. In this article, I will develop a bullish thesis on Meta Platforms, arguing that it is well positioned to grow profits in the coming year.

Revenue summary

Meta’s fourth quarter release was mixed. It wasn’t the disaster that after-hours trading implied, but it certainly contained some worrying metrics. Highlights included:

  • Turnover: 33.67 billion dollars, up 20%.

  • Operating income: $12.5 billion, down 1%.

  • Diluted EPS: $3.67, down 5%.

  • Operating cash flow: $18.1 billion, up 29%.

Revenue was a significant beat, but with EPS down 5%, that was no consolation to investors. Net profit fell 8%, EPS fell much less as Meta made $19 billion in buyouts in the fourth quarter. The most encouraging metric in the report was cash flow from operations. Up 29%, that was a big improvement. There was about $4.4 billion in amortization and stock-based compensation that dampened GAAP earnings in the fourth quarter. These costs do not affect the actual cash flow of the business. Stock-based compensation can sometimes dilute equity, but in the fourth quarter stock awards were more than offset by the $19 billion in buybacks. So that was a pretty solid performance on the cash flow front.

It was pretty much the same story with free cash flow (FCF). At $12.5 billion, it was up 36% year-over-year. That’s pretty solid growth, but there’s an important caveat I need to make here. FCF’s positive growth was due to FB paying a $5 billion fine a year prior. The growth rate would have been negative without this one-time cost. Still, improved free cash flow means more cash for FB to add to its cash flow and potentially invest in the future. This in itself is a huge advantage.

Free Cash Flow Meta Platforms

meta platforms

Outlook

Based solely on the financial data I just reviewed, the 23% after-hours crash in FB stocks would be decidedly irrational. A 4% shortfall does not justify a 22% reduction in the price of a stock. Theoretically, stocks are valued at the present value of their cash flows, and FB’s FCF rose 36% in the fourth quarter and 67% for the full year. Thus, the results observed in the fourth quarter do not, on their own, justify a massive sale of 23%. On a cash flow basis, growth was extremely positive for the year. Additionally, profitability remained strong, with an operating margin of 37% for the quarter.

Fourth quarter 2021 meta-platform results

meta platforms

So you have to look elsewhere to understand why FB sold out. The most likely culprit is the steering. In his commentary, CFO David Wehner predicts:

These were both real predictions. 3% revenue growth would be the worst in Meta’s history, and a $10 billion impact on revenue could cut profits by more than 10%. However, there is a small catch here:

Wehner is infamous for giving weak advice. MarketWatch nicknamed him the “little silicon valley chickenbecause of its tendency to under-promise. In an article titled “Facebook investors: are you starting to see a trend yet?” MarketWatch noted that Wehner had consistently given weak guidance in previous quarters. More often than not, FB has exceeded Wehner’s predictions in the following. A classic example of this would be in the last quarter of 2020. When that quarter’s results were announced, Wehner warned of a revenue deceleration in the coming year. In fact, revenue grew faster in 2021 than in 2020. It may well be that this time Wehner actually found something to worry about. But given his known tendency to under-promise and over-deliver, it seems more likely that he’s just being conservative. It’s a good thing, not a bad thing.

Evaluation

As we’ve seen, Meta Platforms had a mixed quarter with strong revenue and cash flow, but weak earnings. The guidance was a bit scary, but again, the FB guidance almost always is. So far, it seems the 22% after-hours sell-off was unwarranted. But it gets even crazier. Not only were Facebook’s fourth-quarter earnings not so bad, they were in an extremely undervalued environment. According to FB’s latest annual results, the valuation multiples at Thursday’s closing price were:

For a tech stock the size and growth of FB, some of those multiples are extremely low. In particular, multiples of earnings and cash flow from operations. The price to sales ratio is quite high, but with Facebook’s high margins, that’s not really an issue. In addition, we have tremendous growth in operating cash flow and free cash flow which, combined with ongoing buybacks, could deliver a lot of shareholder value.

Also note that I calculated all of the above metrics based on yesterday’s closing price. The stock price was 22% lower after hours. By the time you read this, the multiples may have fallen further. For example, the price to operating cash flow ratio would shrink to just 12.2 if the stock price reached $250! You don’t see mega-profitable, fast-growing companies going up for sale like this all the time, so now might be a good time to rack up some stock.

Risks and Challenges

As we’ve seen, FB is a cheap stock that continues to see strong growth in revenue and cash flow. It missed fourth-quarter earnings, but it beat revenue. The market seems to have overreacted. Still, you can’t completely ignore the Wall Street consensus. Mr. Market is fickle, but there is often some truth in his thinking. With that in mind, here are some risks and challenges that FB investors should watch out for:

  • The metaverse isn’t going anywhere. FB forecasts $10 billion in spending on the Metaverse in 2022. In Q4, this segment as a whole generated $877 million in revenue. With spending at this rate, the segment is going to incur losses for FB in 2022. That doesn’t mean it will never pay off. It could become a profit center in the years to come. But to succeed, Meta will have to overcome a number of obstacles, such as people’s aversion to VR headsets. It won’t be easy. Additionally, it’s unclear exactly how Zuckerberg will monetize all of his metaverse ventures. Oculus generates some revenue but it does not have enough users make a significant contribution to the bottom line of a company the size of Meta. So the whole metaverse is a huge question mark based on the data we have today.

  • Legal risk. Despite the fierce competition Faces of TikTok’s FB, the FTC still imagines the company is a monopoly. The agency recently refiled its anti-trust lawsuit which sought to force FB to dismantle its Instagram and WhatsApp subsidiaries. These two subsidiaries are absolutely essential to Facebook’s user growth, as the main platform Facebook.com lost users in the fourth quarter. The legal risk here is therefore significant.

  • Apple app tracking. Apple’s app tracking changes slashed FB revenue in the fourth quarter. While the company didn’t say exactly how much revenue it lost to app tracking this quarter, it said it expects a $10 billion revenue loss for the full year. If Facebook can’t find a way to get people back to tracking, its growth will be much slower in the future. That’s not to say it won’t grow – as we saw in the Q4 release, it can grow in the double digits even with Apple’s app tracking changes in the background. But expect some slowdown.

The essential

The bottom line about Meta Platforms is that it is an undervalued title that is currently going through some minor challenges. Selling after hours looks like an extreme overreaction. Yes, FB missed EPS and gave weak guidance, but it also beat revenue and provided strong profitability metrics. It wasn’t a terrible term at all. And if the metaverse spending ever pays off, then all those higher costs are worth it.

Share.

Comments are closed.