Leon Neal/Getty Images News
Leon Neal/Getty Images News
Meta Platforms, Inc. (FB) reported an underwhelming quarter that shook the foundations of advertising technology (ad tech) investors. Meta’s disappointing FY22 guidance came after the US digital ad leader Alphabet (GOOGL) (GOOG) reported robust earnings and solid guidance.
Moreover, Meta telegraphed continued headwinds over its ad tech throughout 2022 due to Apple’s (AAPL) IDFA changes. Furthermore, it has been “compelled” to ramp its format change to short-video through Reels in its bid to catch up with the leader ByteDance’s TikTok (BDNCE). In addition, it also expects lower monetization rates over Reels due to fewer impressions as Meta continues its transition journey. If that’s not all, the company also highlighted that it continues to see supply chain headwinds and costs inflation persist. Notably, it expects such headwinds to persist throughout 2022, as advertisers adjust their budgets accordingly.
Hence, we were not surprised that FB stock ended up getting pummeled in post-market trading, declining almost 23% in the process.
We think the reaction is justified. The headwinds consist of both cyclical and structural impacts. It was trading at about 25% below our implied value fair before the release. So, we believe the market is right to adjust its expectations on FB stock’s valuation given these headwinds. Despite that, we think that FB stock buy point remains attractive. But, investors need to consider a multi-year approach with CEO Mark Zuckerberg & Team’s execution now. Hence, if you are looking for a shorter-term opportunity, FB stock may not be appropriate for you.
Meta DAU and MAU (Company filings)
Meta DAU and MAU (Company filings)
Meta reported daily active users (DAU) of 1.93B and monthly active users (MAU) of 2.91B. Therefore, the ratio of DAU/MAU remains resilient at about 66%. Moreover, the deceleration in QoQ growth has already been noted in previous quarters. Thus, while the sequential growth flattened in FQ4, we don’t think the market expects huge upside surprises, given that FB already has 2.91B MAUs.
We also highlighted in a previous article that Instagram will be the critical focus of Meta’s growth moving forward. But, Meta provided guidance commentary that presented clear headwinds in its bid to transition Instagram’s focus to short-format video quickly. CEO Mark Zuckerberg emphasized (edited):
What are the similarities and differences to what we’ve done in the past? The big similarity is that this is certainly not the first time that we’ve gone through a major format evolution. The transition to Reels is still in the early innings, and our ad system and business are not as tuned for the new format. So as the engagement to the new thing starts to replace some of the engagement in the old thing, it creates a near-term headwind for revenue. At this point now, it is not that big of a concern for us. Although it makes some of the stuff not as clear in the near term, but over the long term, we’re pretty optimistic about that. And with Reels, I would say that the teams are executing quite well, and the product is growing very, very quickly. (Meta’s FQ4’21 earnings call)
Therefore, it’s clear that Zuckerberg has telegraphed meaningful near-term headwinds to Instagram’s monetization capability. Nonetheless, he also clarified that it should not impact its long-term potential. Still, Meta’s move to short-format confirms that TikTok is the leader in the space now, which Meta also noted in the call.
What perturbed investors further was Zuckerberg’s acknowledgment that TikTok’s rapid adoption could pose structural headwinds in the growth of Reels. He added (edited): “The thing that is somewhat unique here is that TikTok is so big as a competitor already and also continues to grow at quite a fast rate off of a very large base. Hence, it takes us longer to kind of get to where we want on this.”
Moreover, our checks on TikTok demonstrate that it continued its rapid growth in 2021, even though it decelerated from 2020. But, keen investors should recall that TikTok was “the world’s most visited site on the internet in 2021.” Furthermore, eMarketer’s estimates also suggest that TikTok is on track to gain even more traction among marketers through 2025, surpassing YouTube, and expected to close in on Instagram’s share. Furthermore, recent Sensor Tower figures demonstrated that TikTok has continued its rapid ascendency over consumer spending. Sensor Tower indicated (edited): “Users spent approximately $2.3B last year in the mobile app, which includes the iOS version of its Chinese localization Douyin. This figure represents 77% YoY growth from $1.3B in 2020.”
Furthermore, Sensor Tower also highlighted that TikTok’s revenue reached a record high in Q4’CY21, posting $824.4M compared to $382.4M in the previous year. Furthermore, its US revenue share increased from 8% in Q4’CY20 to 13% in Q4’CY21. Notably, it represented a 3.7x increase, from just $29.6M in Q4’CY20 to $110M in Q4’CY21. Hence, while China remains ByteDance’s most important market, it’s gaining significant momentum in the US. Little wonder that has caused a considerable amount of concern at Meta Platforms.
Meta communicated clearly in the call that it sees Apple’s IDFA changes as structural. Moreover, the adjustments to navigate these changes are likely going to be a multi-year journey. Therefore, it’s a clear message to investors that the headwinds on its transition to Apple’s new AppTrackingTransparency (ATT) framework will persist in FY22.
We believe this was where the Street and the market got it all wrong, including us. Perhaps, we weren’t clear about how these privacy changes could impinge on Meta’s FY22 outlook, as we were confident that management would find a way out of trouble.
But, we thank Meta for getting its guidance clear to investors. Therefore, the warning to ad tech investors out there should be unequivocal. Apple’s IDFA changes will significantly impact the industry’s ability to target and attribute for their direct response ads. Thus, focusing on publishers’ first-party data and the ability to unlock it is even more crucial now for advertisers. But, the mood over at Apple and Alphabet in their recent earnings call couldn’t have been more contrasting. Both companies reported robust results that didn’t imply the kind of structural headwinds that Meta has telegraphed. Notably, Meta CFO David Wehner articulated (edited):
The impact of iOS overall as a headwind on our business in 2022 is on the order of $10 billion, so it’s a pretty significant headwind. E-commerce was an area where we saw a meaningful slowdown in growth in Q4. But, Google called out seeing strength in that very same vertical. And if you look at it, we believe those restrictions from Apple are designed in a way that carves out browsers from the tracking prompts Apple requires for apps. And so what that means is that search ads could have access to far more third-party data for measurement and optimization purposes than app-based ad platforms like ours. And as a result, we believe Google Search ad business could have benefited relative to us. It takes a different set of restrictions from Apple. And given that Apple continues to take billions of dollars a year from Google Search ads, the incentive clearly exists for this policy discrepancy to continue. (Meta’s earnings)
It is interesting for Meta to call out Apple and Alphabet and highlight their relationship. It seems to renew a call to regulate that relationship over antitrust concerns. Furthermore, Microsoft also weighed in Apple’s battle with Epic Games recently, calling out the Cupertino company as having “extraordinary gatekeeper power.” Microsoft also added that “if the original ruling is upheld, the result could be that it would “insulate Apple from meritorious antitrust scrutiny and embolden further harmful conduct. The company further concludes that this would mean innovation will suffer.”
Meta stock EV/NTM EBITDA 5Y mean (TIKR)
Meta stock EV/NTM EBITDA 5Y mean (TIKR)
Before the revelations by management in yesterday’s earnings call, our implied fair value (FV) estimates point to about a 25% upside to our implied FV estimates. Moreover, Meta stock has also traded at around its NTM EBITDA 5Y mean.
Therefore, we think the market has gotten it right. These are structural headwinds that will take several years to resolve while also concurrently investing in its metaverse ambitions. The 23% hit in post-market to its stock price is justified in our opinion. Nevertheless, that also means that FB stock has been de-rated sufficiently to reiterate our Buy call.
However, we wish to emphasize that FB stock could continue to trade sideways until management shows progress in navigating these headwinds. Therefore, you should only consider FB stock if you have at least a five-year horizon.
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