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Meta - profits halve on advertising slowdown and rising costs

Third quarter revenue fell 4% to $27.7bn, with the vast majority of this stemming from weaker advertising revenue.

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Third quarter revenue fell 4% to $27.7bn, with the vast majority of this stemming from weaker advertising revenue. The average price-per-ad fell 18% compared to last year.

An average of 2.93bn people used the group's platforms including Facebook, Instagram and WhatsApp every day throughout the quarter, which was 4% up on last year.

Total costs and expenses rose from $18.6bn to $22.1bn, largely reflecting higher research and development spending. As such, operating profit fell 45.7% to $5.6bn, and earnings were much lower than the market expected.

In the final quarter, the group's expects total revenue to be $30 - $32.5bn. Meta's also making significant changes to boost efficiency, this will include an ''estimated $900 million in additional charges related to consolidating'' its office footprint.

Meta shares fell 19.7% in after-hours trading.

View the latest Meta share price and how to deal

Our view

Meta is in trouble. The market has taken a sledgehammer to the Facebook-owner's valuation this year. Third quarter results told a story of further slowing advertising demand and rising costs.

Ad revenue is Meta's bread and butter. Unfortunately, its platforms don't hold as much sway with marketing teams as they need to. This isn't the first time the social media giant has lagged, and that reflects the fact that competition is fierce, with younger entrants like TikTok a serious opponent. In such uncertain and difficult times, other big names are struggling because marketing teams spend less when things are tough, but Meta's inability to keep hold of its customers' share of wallet is concerning, and keeping punters is coming at the expense of slashing prices. These days, a brand Facebook post reaches about 2.2% of page followers - that is low.

Another big question mark from here is how the group will propel meaningful growth. Mounting competition, iOS privacy changes and difficulty monetising video content are all headwinds keeping those revenue expectations muted.

The difficulties ahead aren't lost on management, and that's where the grand metaverse plans come in. Unfortunately, the roll out and take up of the group's virtual reality products has had a sluggish start, despite the seemingly never-ending upwards spiral of the research and development budget. This is problematic because Meta doesn't have other income streams to fall back on, so as it stands, when advertisers turn off the tap, Meta's revenue funnel runs dry very quickly.

Plus, we have yet to see Meta unleash the full potential of WhatsApp and Messenger in terms of ad revenue. Paths to further monetisation are hazy.

Big names like Google and Meta have been accused of monopolising their territory through unfettered acquisitions of smaller rivals. Now the FTC (Federal Trade Commission) is out to make sure it doesn't happen again as big tech looks to snap up virtual real estate in the metaverse. This is another challenge to Meta's growth ambitions.

There's an argument to say there must come a point where Meta's valuation is attractive, where upside potential outweighs downside risks. But we'd advise caution - we need to see a clear plan to stop the rot - both in terms of short term financial performance, and the longer term strategy.

With the metaverse unproven, keeping the advertising business healthy is vital. The group's got deep pockets and an enviable trove of customer data, but it seems that's not been enough to boost investor sentiment just yet.

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.

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.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 27th October 2022