Meta Stock: The rising expenses and Capex are worrying
November 04, 2022
Meta shares nosedived 25% after the company's recent Q3 results. Meta's expenses are rising and the company is seeing softer revenue growth and softer margins. The slowing advertisement revenue has forced the company to look for new investments and the market is doubting when or if these investments will pay off.
Perhaps most importantly, the increase in expenses and Capex has plummeted Meta's cash flow margin in the most recent quarter. This is a material change to Meta’s story as the company was the leading FAANG stock on free cash flow yet reported a sudden, drastic reversal in Q3.
Below, I discuss the company's recent results in a detailed analysis below.
Meta’s Revenue is Slowing
The company’s revenue in Q3 fell by 4% YoY to $27.71 billion and was up 2% on a constant currency basis. The company managed to beat the consensus estimates by 1.2%. This is the company's second consecutive quarter of declining revenue.
CEO Mark Zuckerberg attempted to address concerns in his opening remarks yet the market was not buying it, “We now reach more than 3.7 billion people monthly across our Family of Apps. And while we continue to navigate some challenging dynamics of volatile macro economy, increasing competition, ad signal loss and growing costs from our long-term investments, I have to say that our product trends look better from what I see than some of the commentary I have seen suggests.”
While the company does not fully acknowledge the change in business model that we discuss in our analysis “Facebook Stock: A Permanent Change To The Business Model” results show that the company is struggling with growth. The management expects growth to return next year as Mark Zuckerberg said, “We are still behind where I think we should be, but we believe that we will return to healthier revenue growth trends next year. That said it’s not clear that the economy has stabilized yet.”
Management’s guide for next quarter is $31.25 billion at the mid-point of the guidance, representing a YoY decline of 7.2% and the guide includes 7% foreign exchange headwinds. Analysts expect revenue to decline by 6.1% in Q4 and 1.6% in Q1 2023. The consensus estimates suggest that revenue growth is expected to return in Q2 2023.
Softer Operating Margins
In addition to revenue declining, the sell-off was also fuelled by a declining operating margin. Operating income fell 46% YoY to $5.66 billion. The Family of Apps segment operating income was $9.3 billion and Reality Labs operating loss was $3.7 billion. Total costs and expenses rose 19% YoY to $22.1 billion.
The company has seen a significant drop in the operating margin. Operating margin was 20% compared to 29% in Q2 2022 and 36% in the same period last year. It is significantly lower than the company’s historical period as seen in the chart below.
The management expects total expenses to be $86 billion at the mid-point of the guidance for the full year 2022, which represents YoY growth of 21%. This includes $900 million in additional charges for consolidating the office facilities that the company expects to record in the fourth quarter. I estimate the operating margin for Q4 to be 23% which would be significantly lower than the 37% in the same period last year.
Sign up for I/O Fund's free newsletter with gains of up to 403% - Click here
For Q3, Meta had capital expenditures, including principal payments of financial leases of $9.52 billion, up 109% YoY.
YTD 2022, the Capex is $22.8 billion, and the management guidance for the full year 2022 has been revised to $32-$33 billion from the previous range of $30-$34 billion.
This represents YoY growth of 69% at the mid-point of the guidance. Doing the math suggests Q4 Capex will be about $9.7 billion, up 75% YoY and up 1.9% QoQ.
Source: Company Investor Relations
Dave Wehner, CFO of the company said in the earnings call, “Turning now to the specific CapEx outlook for ’22 and ’23. We expect 2022 capital expenditures, including principal payments on finance leases, to be in the range of $32 billion to $33 billion updated from our prior range of $30 billion to $34 billion. For 2023, we expect capital expenditures to be in the range of $34 billion to $39 billion driven by our investments in data center servers and network infrastructure. An increase in AI capacity is driving substantially all of our capital expenditure growth in 2023.”
Turning now to the specific expense outlook for ’22 and ’23, we expect 2022 total expenses to be in the range of $85 billion to $87 billion updated from our prior outlook of $85 billion to $88 billion. This includes an estimated $900 million in additional charges in Q4 related to consolidating our office facilities footprint that we expect to record in the fourth quarter of 2022. We anticipate our full year 2023 total expenses will be in the range of $96 billion to $101 billion. This includes an estimated $2 billion in charges related to consolidating our office facilities footprint.”
It's earnings season and our premium members have been getting deep dive analysis on the top tech stocks each week, on top of real-time trade notifications, technical analysis from our portfolio manager, weekly webinars, and more. Learn more about becoming a premium member here.
The Bottom Line
The increasing expenses, particularly in the reality labs segment, have weighed on the company’s profits. The management expects the reality labs segment losses to continue in the next year and investors don’t seem confident the company’s spend on the metaverse will materialize into growth or profits for some time.
On the other hand, the company has been investing heavily in cloud infrastructure and artificial intelligence. The increase in Capex reduces the company’s free cash flows. This is a concern since Meta led Big Tech on a strong free cash flow margin in the past. The free cash flow margin was 1% in the recent quarter and down significantly from 37% in the December quarter.
The company’s net income fell 52% YoY to $4.4 billion. EPS of $1.64 compared to $3.22 for the same period last year. The company’s net profit margin was 16% compared to 23% in Q2 2022 and 32% in Q3 2021.
The company has cash and marketable securities of $41.78 billion at the end of Q3 2022. The debt was $9.92 billion.
The operating cash flow was $9.69 billion (35% of revenue) and free cash flow was a meagre $173 million (1% of revenue) in the recent quarter. The difference between operating cash flow and free cash flow is the high Capex.
Meta Platforms was once a stock market darling for its solid revenue growth, strong profits and cash flow. Times have changed, and the company is now struggling with slowing ad revenue. It’s not only the increased expenses and capex that are an issue, rather a clear path to monetization that goes with it.
If you’d like more information regarding how the business model has changed, please reference the articles below.
Gains of up to 403% from our Free Newsletter.
Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!
+344% on Nvidia
+403% on Bitcoin
+218% on Roku
*as of March 15, 2022
Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.
If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 324% on Zoom, 601% on Nvidia, 445% on Bitcoin, and 4-digits on an alt-coin. The I/O Fund is audited annually to prove it’s one of the best performing Funds on the market with returns that beat Wall Street funds.
More To Explore
Nvidia Will “Still” Surpass Apple’s Valuation
My coverage on Nvidia as an AI leader began in 2018 (yes, really – five years ago). Since then, I’ve covered the AI microtrend for this specific stock 27 times on my research site, which is the equiva
FAAMG Stocks Trading At Precarious Valuations
The mega-cap stocks that are known as FAAMG reported earnings recently. These names are driving the market higher, especially Microsoft and Apple. In fact, the percentage of Microsoft and Apple’s comb
Apple’s Stock In Focus: More Profitable Than Banks
Investors looking for the “next big thing” will point toward companies like Stripe, Sofi or Square as the leading fintech stocks. Meanwhile, the next big thing to disrupt the financial sector may be s
This Stock Price For Netflix Is A “Buy” For 2023
In April of 2022, Netflix surprised the markets by reporting its first subscriber loss in nearly 10 years. The stock tumbled 35% the following day, as investors panicked. Famed hedge fund manager, Bil
Where the I/O Fund Holds Cash When Banks Keeps Failing
Amidst the growing skepticism in our banking sector, we thought it would be helpful to introduce an alternative way to both protect and diversify one’s assets. The information below discusses a method
Tesla Stock: What You Need To Know About Q1 Earnings
Two months ago, we wrote that after realizing gains of 31%, it was time to take a time out on Tesla at the $208.31 price when our firm stated: “Right now, our technical analysis is at odds with our fu
Bitcoin Vs Banks: Here's Where the Price Goes Next
The recent decoupling of Bitcoin from equities, we believe, is the start of a new uptrend that appears to be inversely correlated to the financial sector. The financial media would have us believe tha
Official Press Release: I/O Fund’s Cumulative Returns Double the Nasdaq Following a Tough 2022
Actively managed portfolio and research site announces its largest cumulative lead over institutional all-tech portfolios. The I/O Fund defies a challenging market, outperforming peers and providing i
Slowdown In Cloud Stocks On Thin Ice Following Q1 Guides
Following last quarter’s earnings, we published an analysis on cloud that showed hyperscalers were slowing (5%) sequentially and best-of-breed was slowing (12%) sequentially, based on Q4 guides.
NVIDIA Showcases AI Breakthroughs, Omniverse Platform, and New Partnerships at GTC 2023
The tech giant reveals cutting-edge AI advancements, a powerful cloud based Omniverse platform, and strategic collaborations in the automotive industry.