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In the wake of Meta Platforms’ (NASDAQ:FB) Q1 earnings report, the market and analysts cheered at the results saying, “it wasn’t as bad as it could have been.” Let me be clear: revenue numbers were nothing short of disappointing. Meta is not a company to miss market estimates and fall short of guidance for the upcoming quarter or year. You might think then I’m bearish on the name. But even as bad as the report was, the financials weren’t my focus; it was management’s realization it had put the cart before the horse in terms of investments. This about-face in this department has kept me in the name and provides a backdrop for it to repeat its past successes.
Let’s start with the fact the market shot up 18% and more in the report’s aftermath. The numbers didn’t support this kind of reaction, not in this tepid equity market environment; companies have been killed even with inline or above consensus numbers. Yet even when Meta reported $27.91B in revenue versus consensus of $28.22B for Q1 and guided Q2 for $29B versus estimates of $30.69B – a year-over-year decline in revenue at the midpoint – the stock rallied.
This doesn’t jive, even with the stock down from late November to April’s earnings as much as peers like Snap (SNAP); tech wasn’t getting any free passes from the market.
But there’s more to the story, and the net income and EPS lines hinted at the changes.
The weak revenue but strong EPS numbers, which beat by 6.5%, came from a shift in management focus. Last year, while revenue growth percent was in the 40s and 50s, Mark Zuckerberg and team began shifting priorities toward the “metaverse.” This was intended to be a multi-year, multi-pronged push toward the next interactive internet technology. It was the buzzword all major technology companies, from semiconductors to software houses, began touting in the Fall of 2021.
But the problem was Meta Platforms was facing a very dire situation: its ad business was in decline due to iOS privacy changes. This wasn’t unexpected – the company had known this was coming for a while. It didn’t rear its ugly head in full until Q4, when revenue growth began to slow amid lapping strong pandemic quarters and pre-iOS privacy changes. To top it off, Q1’s guidance of single-digit growth cemented the shift.
Singling out just one factor isn’t fair to assess how dire the revenue growth situation is. Many factors are involved in the company’s slowing revenue growth, including iOS targeting and measuring difficulties, the lapping of higher growth from the strong pandemic quarters, a shift toward Reel viewership, and competition from other apps like TikTok and Snapchat.
The iOS privacy change was the most significant factor as it put Meta’s entire automated ad serving and measuring system into chaos. Without being able to directly target a user based on an ID linked to their phone, the company cannot know who exactly saw an ad and took action. This makes targeting ads and measuring effectiveness more difficult. In fact, it’s become so difficult that the company has had to resort to manual intervention.

On measurement, we’ve been able to close a good part of the underreporting gap and shared that with advertisers, but the rest of the gap will take us longer to close. This is a particularly big challenge for small businesses, because we have to work with them. We have to work with them, obviously, in a longer tail and more resource-intensive way.
– Sheryl Sandberg, COO, Q1 Earnings Call
This means exactly what you think it means: less revenue and higher costs. Moving back toward human oversight on ads means more resources dedicated to doing the same thing its automated ad technology has been doing for years. This requires additional human capital and introduces inconsistencies in ad measurement, leaving the advertiser with less of an idea about their ad campaign’s effectiveness, not to mention waiting for the assistance needed to drive a cost-effective campaign.
The company needs to focus on this and not its shiny new investments, especially during an identity crisis of sorts.
And this is precisely what has started to happen.
These few comments were encouraging to me as a shareholder and what will keep me in FB for the next several months to several quarters:

On the Family of Apps side, I am confident that we can return to better revenue growth rates over time and sustain high operating margins.

So over the next several years our goal from a financial perspective is to generate sufficient operating income growth from Family of Apps to fund the growth of investment in Reality Labs while still growing our overall profitability.
– Mark Zuckerberg, CEO, Q1 Earnings Call
Management is shifting its focus toward its bread and butter after realizing it cannot pursue the metaverse (at 100% mode) and fix the looming issues for its core business. Remember, it’s not just iOS changes it’s dealing with; it’s trying to monetize a new product and compete with other apps for its share of time in a post-pandemic world.
I’m glad to see this kind of talk from the executive team because of its track record of overcoming the same obstacles throughout its entire public life. The way management plans on tackling this is the same way it’s seen success before and the same stance I took in many of my bullish articles on the company in 2018. For example, it has successfully monetized mobile, Instagram’s feed, and Stories. Monetizing Reels, therefore, runs in the same vein.
Zuckerberg walked through this thought process on the call:

Back in 2012 when we transitioned from desktop feed to mobile feed, we saw mobile feed growing massively but not monetizing well yet, and we leaned into it, went through some tough quarters, and then it became the foundation of our business today. Similarly, in 2018, when people started using stories more instead of feed but stories didn’t monetize as well as feed yet, we still doubled down on stories, had another tough period but came out stronger than ever. So we’ve run this play before and we’re running it again now. We’re focusing on growing Reels as a major part of the Discovery Engine vision, and we expect that this expansion in engagement to shift from a short-term headwind to a tailwind at some point.
– Mark Zuckerberg, Q1 Earnings Call
This is good. This sufficiently addresses the Reels monetization and the ramping of ads on it. The company needs to focus on this because it has proved fruitful in the past. It will also lend itself to figuring out iOS headwinds as it pushes further into a different kind of monetization.
This transitions to why EPS beat unexpectedly in the face of a miss on revenue. It had begun to shift away from explosive investment growth in its Reality Labs division to focus on the core ad business. This is expected to continue and why the company issued new expense guidance on the call.

We expect 2022 total expenses to be in the range of $87 billion to $92 billion, lowered from our prior outlook of $90 billion to $95 billion.
Dave Wehner, CFO, Q1 Earnings Call
After growing expenses by 38% in Q4, the company slowed to 31% in Q1. The rest of the year appears to keep the same slowing pattern as 2022 expense growth is only 25.7% over 2021 using the midpoint of guidance.
This is what the market liked in the report, and without this, the stock likely would not have rallied. Granted this margin compressing growth is well above the expected 8% revenue growth, the market had expected Meta to push without concern into the metaverse with much higher investment levels before this earnings call.
All of this doesn’t preclude the mountain of revenue headwinds facing the company with the iOS privacy changes and competition for time among the many apps available, especially with the pandemic now in the rearview. So this re-focus of company priorities isn’t the end of the bear thesis. However, most of it is baked in under $200 per share. With the company easing back on investments, it allows free cash flow to expand via higher operating cash flow and the unchanged guidance for CapEx.
With price-to-free cash flow at five-year lows and expectations for cash flow to be higher than initially expected going into the year, the stock trades at an enormous discount versus its ability to generate cash. Even with an incremental decline in free cash flow for 2022 and a 20 times multiple, Meta would trade around $260, 33% higher than Monday’s trading.
But, of course, the real question is will the current market environment treat Meta to a reprieve in valuation. As of right now, no. But, as I tell my subscribers to Tech Cache, dollar cost averaging in and out is critical to biding your time in building a position, taking the short-term market opportunities for the long-term gain.
Overall, I’m more comfortable holding my current position after management changed its tune regarding investments while its core business deals with a difficult storm. Seeing improvement in its Reels monetization shouldn’t be a difficult task. However, the issue of iOS ad targeting and competition among rivals is still a cloud over the company. The bottom line is management had faced trials like this before and overcame them each time. The saving grace is management’s recognition of this and being aware it’s not the time to foray into new adventures but instead restructure its core business among the many headwinds it’s facing in 2022.
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This article was written by

Joe has a Bachelors of Science in Computer and Electrical Engineering. He follows technology related companies as well as blue chip industrials and consumer products. Joe writes mainly about technology companies, especially ones that he uses and consumes. Knowing the technical side of the products helps him in his analysis of what the product impact is to consumers and the markets they reach. Joe’s interests lie in tech and growth stocks.
Joe works for a technology contracting company as a Release Manager working with Dev/Ops tools and integrating CI/CD systems. This entails automating workflows and deploying compiled artifacts using change control/version control software and deployment automation tools. The sector of his work is governmental and deals with the department of health. He previously worked in the IT field of the healthcare industry for a major teaching hospital and practice group working mostly with integration engines for use with hundreds of systems as well as end user application access and security including single sign-on.
Joe enjoys a variety of hobbies including playing drums and building racecars made for the ice and asphalt. He raced nationally in college for Baja SAE and continues to build racecars and race on a regional level both on road courses and frozen lakes.
Disclosure: I/we have a beneficial long position in the shares of FB, SNAP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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