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Meta - stalling growth prompts lower guidance

Second quarter revenue fell 1% to $28.8bn, at the bottom end of guidance. Excluding the impact of exchange rates, advertising revenue...

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Second quarter revenue fell 1% to $28.8bn, at the bottom end of guidance. Excluding the impact of exchange rates, advertising revenue, which makes up the lion's share, rose 3%. An average of 3.65bn people used the group's platforms including Facebook, Instagram and WhatsApp in June, up 4% year-over-year. Facebook monthly active users were 2.93bn, reflecting a 1% increase.

Operating income was down 32% to $8.4bn, reflecting slower revenue growth and a 22% increase in costs driven by rising research and development spend.

Third quarter revenue is expected to be between $26bn and $28.5bn, reflecting weaker advertising demand and a 6% negative impact from exchange rates.

Shares fell 4.7% in early trading.

View the latest Meta share price and how to deal

Our view

There was very little to get excited about in Meta's second quarter results.

Top and bottom line declines can partly be attributed to what's likely to be shorter-term exchange rate headwinds. But an undeniable driving force behind the lacklustre growth is scale. With close to 3bn people logging into Facebook, WhatsApp, Instagram and/or Messenger every day, exponential growth is much harder to come by.

Marketing teams, who pay handsomely to make the most of the data footprints all those users leave behind are also starting tighten their belts amid a worsening economic climate. And ad revenue is Meta's bread and butter.

The recent slowdowns in ad revenue expectations have been sharper than we'd have liked. And it's partly why the company trades on a lower than average valuation. The biggest 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.

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

Meta'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 with regulators breathing down Meta's neck, it could be that way for quite some time. Big names like Google and Meta have been accused of monopolising their territory through unfettered acquisitions of smaller rivals. Now the FTC's (Federal Trade Commission) out to make sure it doesn't happen again as big tech looks to snap up virtual real estate in the metaverse. The commission's aiming to block Meta's proposed acquisition of virtual reality firm Within in what's a shot across the bow for the entire industry.

It adds to a growing list of reasons Meta's metaverse is off to a sputtering start. Chief among them being a company-wide spending cut to cope with waning advertising spend. But even if Facebook was able to splash out, it may well lose the power to sweep up competitors encroaching on its territory

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 that's not enough to boost investor sentiment. It's all bad news these days for Facebook and that's shaved a fair amount off the valuation, but some caution is warranted until the social media giant is back on course.

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.

Second Quarter Trading Update

Family of Apps (FoA) which includes Facebook Instagram, Messenger and Whatsapp saw revenue fall from $28.8bn to $28.4bn. Operating profits fell 24.6% to $11.2bn.

Reality Labs (RL) under which augmented and virtual reality hardware and software sit, saw revenue rise 48.2% to $452m. Operating losses for this division widened from -$2.4bn to -$2.8bn.

Ad impressions rose 15% but price per ad fell by 14%. Average revenue per user across the family of apps rose slightly from the first quarter to $7.91, but was down 5.4% year-over-year.

Full year capital expenditure guidance has been pared down to $85-88bn from $87-92bn to account for a more challenging environment.

Free cash flow in the quarter nearly halved to $4.5bn, reflecting lower profitability and higher investment. Net cash stood at $40.5bn.

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: 28th July 2022