Meta: Under the great headwind, can the Metaverse save Xiao Zha?

A tale of headwinds and prospects

Since September 2021, Meta (Facebook parent company) shares have retraced more than 50% from an all-time high of $384. Meta has been facing various headwinds, such as intense competition from a new generation of social media companies (Snap, Tiktok…), lost revenue from Apple’s new privacy policy, and the fallout from the Russian-Ukrainian conflict.

In addition, Snap recently warned of low demand for online advertising due to inflation (shares fell as much as -43% on May 24) and a shift in consumption to offline marketing as the economy reopens. In short, the general environment in the next few quarters will still be a headwind for social platforms that rely on advertising as their revenue source.

01 Headwind

Meta: Under the great headwind, can the Metaverse save Xiao Zha?

In 22Q1, Meta’s average DAU (daily active users) and MAU (monthly active users) reached 2.87 billion and 3.64 billion, respectively. Since Russia’s invasion of Ukraine began in late February, the fallout could linger into the second quarter.Therefore, the number of active users in Q2 2022 is likely to decline.

In addition to the war-related headwinds, the company continues to be negatively impacted by changes to the iOS privacy policy. Although the loss is difficult to quantify, the company expects to lose about $10 billion in sales in FY22. Of course, it ultimately depends on how users react to the new prompts and whether they consent to third-party apps collecting data and tracking activity.

In terms of engagement, short videos are clearly on the rise and are replacing Highlights and Stories – Reels already account for more than 20% of the time people spend on Instagram, and videos account for 50% of the time people spend on Facebook. There is a tendency for consumers to further migrate to Reels, but Reels are not fully monetized/realized, which means that Meta will face at least short-term losses in the process.

In addition, rising inflation is adversely affecting ad revenue. Shares of Snap tumbled 43% on the day after it warned investors about a sluggish ad demand environment in the coming quarters. As economic activity resumes, some advertiser allocations are also shifting to offline advertising, which will make it tougher for Meta throughout FY22.

Meta: Under the great headwind, can the Metaverse save Xiao Zha?

Meta’s share price has experienced a sharp retracement, and the NTM PE has fallen to 13.2x by market consensus, but I think there is still room to fall in the short term, as the pressure on online advertising is hard to see an improvement in the short term. The company’s woes were further compounded by the recent departure of Sheryl Sandberg, one of the company’s key executives.

02 Vision of the Metaverse

Meta’s earnings report last quarter showed revenue of $27.91 billion, below the consensus estimate of $28.2 billion.However, EPS of $2.74 beat analysts’ expectations of $2.56 on higher-than-expected profit margins.

On the cost side, cost of revenue increased by 17%, primarily due to core infrastructure investments, payments to partners, and higher content-related costs. R&D costs increased significantly by 48% due to hiring staff to support the family of apps and the Reality Lab. Marketing costs increased by 16%, and administrative costs increased substantially by 45% due to legal and staff-related costs.

Meta: Under the great headwind, can the Metaverse save Xiao Zha?

Operating profit fell about 25% to $8.52 billion compared to $11.3 billion in 21Q1. Net profit fell to $7.46 billion, or about 21%, from $9.5 billion a year earlier. Although free cash flow increased from US$7.8 billion in the same period last year to US$8.5 billion, it can be seen that there has been a significant drop from the previous quarter to US$12.5 billion in 21Q4.

Although valuations are now low, such financial models inevitably keep investors away.

From a longer-term perspective, however, there are some positive developments: a new transatlantic data privacy framework allows for the free flow of data in the U.S. To a certain extent, mitigate the impact of iOS privacy policy changes.

For Reels, there is still a lot of room for development of commercial realization potential, which is worth looking forward to.

In terms of active users, although the growth ceiling has been reached, the base has reached DAU 2.87 billion (an increase of 6% year-on-year and a month-on-month increase of 1.7%) and MAU 3.64 billion (a year-on-year increase of 6% and a month-on-month increase of 1.4%). Such a huge user base more or less means that the skinny camel is bigger than the horse, although the ARPU (average user revenue) trend is not so good——

Meta: Under the great headwind, can the Metaverse save Xiao Zha?

ARPU was US$7.72 in the first quarter of 2022, which was basically the same as US$7.75 in the same period last year, but a significant month-on-month decline can be seen. Although advertisers generally increase spending in the fourth quarter to cope with the holiday shopping spree, that is, the increase in the base leads to a quarter-on-quarter decline in Q1, but it can be seen that the decline in Q1 this year is significantly higher than the same period last year.

So now the question is, can the Metaverse save Xiao Zha?

Meta has ambitious long-term growth plans, especially its “Metaverse” project. Zha envisions the “Metaverse” as an innovative medium for people to interact globally through a virtual reality ecosystem, and has invested heavily in bringing this idea to life.

The strategic plan is also relatively clear – get enough operating income/cash flow growth from the app family to transfuse the growth of Reality Labs (Metaverse Project). As of last quarter, Reality Labs had a staggering $2.9 billion in total operating losses, and its ability to burn money is staggering.

While the Metaverse has the potential to be a long-term growth engine, it will take a relatively long time to brew, and many things need to be observed. And unfortunately, there is another bad news today——

Meta: Under the great headwind, can the Metaverse save Xiao Zha?

Guo Mingqi, a well-known analyst in the hardware field, tweeted that Meta lowered its 22-year shipment forecast by 40%, and shelved new headset/AR/MR projects after 24 years (Goertek also fell sharply as a result). Perhaps, Meta is facing a lot more resistance than thought in terms of hardware. Judging from the current situation, it is not optimistic that Xiao Zha will survive this disaster.

03 Conclusion

Below is a set of embarrassing data.

Meta: Under the great headwind, can the Metaverse save Xiao Zha?

It can be seen intuitively that among the Web2 representative companies, Meta’s PE is more than one grade lower than its 22-year or 23-year expectation.

However, what the market looks at is not valuation, but business fundamentals.

As mentioned above, due to multiple headwinds such as fierce competition, changes in iOS privacy policies, and the macro environment, Meta’s key indicators, whether MAU or financial, are facing continuous downward pressure. This also means that the current undervaluation may exist for a long time.

So, will Meta still have a turnaround? There may still be some, but from an investment point of view, it still needs to be more rational, especially in the current environment of mud and sand. Judging from personal experience investing in technology stocks for many years, it is best to enter the market when there is a significant turnaround in new products/businesses.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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