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Meta - Profits stall, outlook tempered

Fourth quarter revenue rose 20% to $33.7bn as ad impressions and price per ad increased by 13% and 6% respectively...

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Meta's fourth quarter revenue rose 20% to $33.7bn as ad impressions and price per ad increased by 13% and 6% respectively, but a 38% increase in costs driven by rising research and development and marketing and sales spend meant operating income was down 1% to $12.6bn.

The group expects first quarter revenue to grow between 3% and 11%. Increased competition together with a shift toward engagement with video content, which feed fewer ads, are expected to negatively impact ad impressions while regulatory changes, Apple's iOS changes and the impact of inflation on advertiser budgets is expected to weigh on pricing.

The shares fell 21.5% in afterhours trading.

View the latest Meta share price and how to deal

Our view

The market has been shaken by the latest set of results. Meta is pumping billions of dollars into new IT infrastructure and it's ambitions to build out the metaverse do little to quell the fear. Usership growth is slowing and advertising revenue is in for a period of stagnation amid inflation. That raises questions about Meta's competitive position in the face of mushrooming rivals like TikTok.

The weaker outlook for advertising is especially concerning because advertising revenue is Facebook's bread and butter, with marketing teams paying handsomely to make the most of the data footprints users leave behind. With around half the world's population logging onto one of Facebook's apps every month, (the obvious one, plus Instagram and WhatsApp), Facebook's significance isn't going anywhere. The same can't be said for the bumper returns the group's investors have become accustomed to.

The group's been building out its video offerings, which are part of the reason for lacklustre revenue estimates. These services don't serve as many ads, making them less profitable, but if engagement continues to climb there's room for the group to expand its current monetisation strategy. Plus, we have yet to see Facebook unleash the full potential of WhatsApp and Messenger in terms of ad revenue.

Facebook's well-documented plan to build a so-called metaverse, a virtual space where users interact in the form of avatars, is another potential long-term growth driver. For now this division is still heavily in the red. And frankly we'd like some specific steer on exactly how the metaverse is going to work. It's a good idea in principle, and if successful, could see marketers prepared to part with even more money for the data Facebook's users leave behind. "If" is doing a lot of the work at the moment, and the investment needed to get this project to fruition is dependent on advertising growth staying spritely.

Facebook's huge scale means increased investment is also needed to keep regulators happy - particularly around security and compliance measures. It's currently facing a whistleblowing scandal around user safety. Not great for stock sentiment, but the outcome is unlikely to be existential.

Facebook's at an important turning point as it braves tougher conditions. Improving monetisation in some parts of the business and squeezing more dollars out of reluctant advertisers is a tall order, but with the metaverse unproven, it's vital. The group's got deep pockets and an enviable trove of customer data. 2022 could be a disappointment for the group, but the current uncertainty could offer those with a longer horizon an opportunity. Still, Facebook's valuation has come down a long way for good reason--there's heady execution risk ahead.

Facebook key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Fourth Quarter Results

An average of 2.82bn people used the group's platforms including Facebook, Instagram and WhatsApp in December, an 8% increase. Monthly active users were up 9% to 3.6bn as of 31 December.

The group is breaking out its augmented and virtual reality hardware and software under the division Reality Labs (RL) from the fourth quarter onward. Income from Facebook, Instagram, Messenger, WhatsApp and other services will be classed as Family of Apps (FoA).

FoA revenue was up 19.9% to $32.7bn but rising costs meant operating income rose 6.8% to $15.9bn. Reality Labs brought in $877m, up from $717m, but posted an operating loss of $3.3bn.

As of 31 December Meta had just shy of 72,000 employees, a 23% increase.

Facebook had a net cash position of $48bn at the end of the year. Free cash flow rose from $9.2bn to $12.6bn, reflecting increased profits and lower spending.

The forecast for capital expenditure for 2022 is unchanged at $29-34bn, driven mostly by investments in data centres, servers and other infrastructure.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 3rd February 2022