This week Meta Platforms reported Q3 earnings:
Revenue -4.5% year-over-year, consensus expectations were -6%.
EPS $1.64, below consensus expectations of $1.84
Constant-currency revenues were up 2%
The initial after-hours market reaction was that the stock was up 8% before it was down 25% eventually the next trading day. The market was spooked by the guidance for operating expenses for 2023 of $96-101b.
I believe it is important to keep in mind that one year ago, $Meta has guided for 2022 expenses of $91-97b. With the 2022 Q3 report, that range has been narrowed down to $85-87b, which is -8.5% less at the mid point of the updated range. I thus take the 2023 expense guide with a grain of salt.
In light of my August write-up on Meta, I was pleased with the results. The family of apps business is developing in line with my expectations:
Daily active people are up 4% year over year, and growing users is one of the core pillars of my investment thesis
Ad impressions increased by 17% year-over-year, and growing ad real estate is one of the core pillars of my investment thesis.
In the call Meta revealed strong momentum for Reels, which is catching up with Tiktok (in line with my investment thesis):
“There are now more than 140 billion Reels plays across Facebook and Instagram each day. That's a 50% increase from six months ago. Reels is incremental to time spent on our apps. The trends look good here, and we believe that we're gaining time spent share on competitors like TikTok.”
Nevertheless, revenue is down nominally, as the average price per ad decreased by 18% year-over-year. I expect this key metric to improve significantly in the 2023. Overall, the tone of the call regarding the near term outlook was rather bullish for Meta’s standards. Even outgoing CFO Wehner seems to be “bullish,” on the way to “super bullish”:
“So I think yes, we think the setup is good, but the overall kind of macro overlay has been challenging, so we're optimistic, but we'll want to see a few more cards turned over before we're going to be super bullish.”
Meta’s share buybacks reduced share count by 1% in Q3, so 4% annualized. This is significantly above my investment thesis, where I am modeling 2.5% share count reduction per year. I hope that Meta is further ramping up buybacks in light of the share price weakness. With $42 billion cash at hand (16% of the market cap), there is certainly a lot of room to ramp up share buybacks even further.
Why is the share price down 25%
Lack of cost control
Investors complain about a lack of cost control in light of the 2023 opex and capex guidance. Clearly, costs are too high right now, given the development of the macro situation. Also, there were rumors in August that Meta planned to reduce costs 10% and this guidance opposed that plan. I understand that the current costs are a result of hiring during much better times (one year ago Meta was growing 33%). On the positive side, Meta guided to keep headcount at current levels for the year 2023. We will hopefully see improvements in the next 12 months. Nevertheless, if the business returns to mid teens growth in 2023 on weak comps, operating profits for the family of apps business segment should be pretty strong if Meta achieves the lower end of the opex guide. There is certainly a lot of room for improvement.
Zuckerberg is not cutting back on the Metaverse
I have no idea why, but obviously some investors were hoping Zuckerberg would cut back on Metaverse spending. Q3 spending on Reality Labs was at a $15b run rate. Given the smaller spending in H1, I expect Metaverse investments to be about $13b for the full financial year 2022. For 2023, Meta guided for further acceleration of investments, so I am expecting about $15b for the full year. This number still represents only a fraction of the operating earnings from the family of apps business and still allows for substantial buybacks.
I recognize the market is at maximum short termism at this point and gives Meta zero benefit of the doubt. This is ok with me. Zuckerberg has proven over and over again that he is way smarter than the market (e.g. Instagram acquisition).
Meta’s Positioning in AR/VR:
Actually, I am pretty bullish on Meta’s progress with reality labs. The Quest Pro is getting some great reviews, but is often criticized for the price. Fair, $1500 is a lot for any product with <0.2% adoption rate. And the mixed reality platform is only getting started with the Quest pro.
Still, it’s clear that the Quest Pro is a desirable, yet unaffordable product for many potential users. Also, everyone and their dog knows how much money $Meta is throwing at this breakthrough technology. Here is where it gets interesting: the ace in Zuck’s sleeve is the Quest 3.
Developers are now starting to build mixed reality applications with the Quest Pro on Meta's OS. And this wave of content will be ready just in time for the release of the Quest 3 next year, which will have the same mixed reality capabilities for about the price of a Quest 2. And it’s becoming increasingly clear that everyone who can’t afford the quest pro is strongly anticipating the release of the Quest 3.
The Quest 2 has been tremendously more successful than the Quest 1. In fact, sales of the Quest 2 in 2021 were about 8 million, which is on par with Xbox sales and almost at PlayStation levels. If the Quest 3 continues this trend, it may outsell all major gaming consoles, representing an inflection point for AR/VR.
Without doubt, there is also a lot of resentment towards Zuckerberg and the Quest Pro. However, all this negative buzz doesn’t change the reality that Meta is releasing breakthrough technology at this point in history. If affordability is the issue, Apple will fail, and the Quest 3 is the fix
From a marketing perspective I find Meta’s positioning quite interesting (whether intentional or not): Quest AR/VR glasses are clearly a valuable product / technology given the 10s of billions Meta throws at it. This leads to a strong value proposition for the consumer.
I also think that Apple is now in a very, very difficult position. If price is the problem for the Quest Pro, then Apple won’t go anywhere with a device for >$2000 and an undeveloped platform. However, just trying will further legitimize the space.
When Apple really releases their mixed reality headset in 2023, it will be compared against the Quest Pro and it will compete against the Quest 3, which will sell for probably 20-25% of the price, but has a pretty well developed ecosystem by then.
So while Apple will have hard stance with their initial device in 2023, Meta will already be working on further optimizing the form factor and performance for future headset releases in 2024. Maybe Apple at least convinces with the hardware design, so Meta can copy that in their 2024 release.