Meta's Big Wednesday

A huge week of earnings awaits. We’ll be hearing from Apple, Amazon, Google and Facebook/Meta among many others, plus important central bank meetings including the US Federal Reserve. Meta’s had by far the biggest fall from grace of the big tech companies. Is the recent rally justified?

The Meta share price is up by over 70% from the November lows. The initial reaction on hearing that could be to think that the rally is overdone. Especially as the price is knocking on the door of the old range lows and 200 day moving average.

On the flip side, the price is also down 60% from the 2021 highs (just above $380). So which is the more compelling case from here?

Wednesday's earnings report and subsequent comments will be closely scrutinised for signs of progress on cost-cutting after Meta’s cash bleed spooked investors last quarter. A problem that was soon ‘remedied’ by the announcement of 11,000 job cuts.

Despite all of the noise around their long-term metaverse investments, this is still a business that depends heavily on advertising revenues.

Much has been written about the increasing competition, especially from TikTok. While this trend is notable, TikTok still isn't anywhere near the size of Meta. As DigiDay points out, ‘the amount of ad dollars spent on TikTok is nowhere near what’s getting dropped on Facebook and Instagram. Last year, the short-form video app raked in around $10 billion in revenue. Facebook did nearly triple that ($27.7 billion) in its last quarter.’

There are also fears that US regulators may clamp down on TikTok use due to privacy concerns. The app has already been banned on nearly all US government devices.

Looking ahead, the overall outlook for the economy is likely to be a huge part of the Meta picture. The company has made early progress on cost-cutting, and the market seems to have adjusted to a more competitive advertising world.

Analysts at Bank of America maintain a neutral rating on the stock, with a price target of $160. They break down their potential positive and negative catalysts for the remainder of the year as follows:

2023 positive cases/catalysts for the stock

Positives for Meta include: 1) Increasing Reels monetization in 2023 will drive revenue uplift, 2) returns on massive AI/ML investments should help generate incremental ad spend, 3) large messaging monetization opportunity will be unlocked by call-to-action ads, 4) Improved competitive outlook with slowing TikTok user and revenue growth, 5) EPS upside on conservative expense outlook and recent cost-cutting initiatives.

2023 negative risks/catalysts for the stock

Risks include: 1) Tough macro conditions drive topline misses, 2) More privacy headwinds from Google, Apple & EU, 3) New tech regulations, 4) Margin headwinds from Reels shift, and 5) Growing investment losses in Metaverse and new competition coming.

Earnings estimates via Newsquawk:

• Exp Quarterly EPS $2.22
• Exp. Quarterly Revenue $31.51bln
• Exp. FY EPS $9.08
• Exp. FY Revenue $116.12bln

When Meta reports, the market will likely be digesting the outcome of the latest Federal Reserve meeting. Expectations are pretty clear. The Fed is likely to hike by 25bps (0.25%) and continue hiking at this slower pace for another meeting or two.

Any shocks/surprises could see Meta’s results swept along for the ride…