Kelly Sullivan
Elevator Pitch
I reiterate my Buy investment rating for Meta Platforms, Inc.’s (NASDAQ:META) stock with this latest article focusing on potential re-rating catalysts that could materialize in 2023. I previously touched on the tech sell off and its impact on META in my earlier article written on June 22, 2022.
My favorable view of META remains intact, and this explains why I have kept my Buy rating for Meta Platforms unchanged. Looking beyond META’s current price weakness in 2022 year-to-date, I think there are catalysts for Meta Platforms that could spark a substantial recovery in the company’s stock price next year.
META Stock Key Metrics
Prior to analyzing Meta Platforms’ stock price weakness and seeking out potential catalysts for the company’s shares, it is relevant to first highlight a few key Q2 2022 metrics for META.
The first key metric for META is revenue growth adjusted for foreign exchange effects. Meta Platforms achieved a decent +3% YoY constant-currency revenue growth in the second quarter of this year, after excluding the effects of negative foreign exchange fluctuations such as the USD strength relative to the EUR.
While investors were worried about the economic weakness in North America and Europe, it appeared this was offset by the strength in other geographic markets. Meta Platforms revealed at its most recent Q2 2022 earnings call that “year-over-year ad revenue growth was strongest in Asia Pacific and Rest of World at 13% and 11%, respectively” in Q2, which was in contrast with negative advertising revenue growth for the company’s European and North American markets in the same period.
Meta Platforms’ second key metric relates to Reels, which is defined by META as “short form, entertaining video experiences” and referred to as a “TikTok clone” by Bloomberg.
The amount of time that Instagram and Facebook users (combined) committed to Reels grew by over +30% in the second quarter of 2022, as indicated by management comments at META’s recent quarterly investor call. This increase in user engagement has translated into top line expansion, as Meta Platforms disclosed at its Q2 2022 earnings briefing that the company has “crossed a $1 billion annual revenue run rate for Reels ads” in the most recent quarter.
The third key metric is operating expenses for Meta Platforms.
META’s operating costs rose by +22% YoY from $16.7 billion in the second quarter of the previous year to $20.5 billion in the second quarter of the current year. The biggest driver of the jump in the company’s operating expenses in Q2 2022 was hiring.
The number of employees increased by +5,700 on a net basis in Q2 2022, and this implied that Meta Platforms had +32% more staff than it had in the same quarter a year ago. But it is noteworthy that META emphasized at its Q2 2022 results call that “our second quarter (of 2022) growth rate (relating to staff strength) reflects our hiring progress earlier this year.” This suggests that the pace of hiring for Meta Platforms going forward isn’t likely to be comparable to that of Q2 2022.
These three key metrics mentioned above are closely linked to META’s share price weakness and re-rating catalysts as I will explain in the subsequent sections.
Why Did Meta Stock Drop This Year?
META’s stock dropped by -53% in this year thus far, while the NASDAQ Composite Index declined by -26% in 2022 year-to-date. The sell off in technology stocks, which I discussed in my previous late-June update for META, highlighting the performance of the other FAANG stocks as well, is a key factor responsible for Meta Platforms’ poor share price performance. Given that META has underperformed the NASDAQ Composite Index by a wide margin year-to-date, the tech sell-off alone can’t explain META’s stock price weakness.
The other major reason for META’s share price fall so far this year is the weak economy and its impact on the outlook for the company’s advertising revenues. This is reflected in Meta Platforms’ Q3 2022 management guidance.
META has guided for the company to deliver a top line of between $26.0 billion and $28.5 billion for the third quarter of this year. This is equivalent to a headline revenue contraction in the 2%-10% range on a YoY basis. But the company also highlighted that its headline revenue guidance includes the effects of a -600 basis points negative impact relating to foreign exchange. In other words, Meta Platforms’ constant-currency Q3 2022 revenue growth guidance is between -4% and +4%. At the mid-point of its guidance, META is still only expecting flat YoY revenue in Q3 2022, adjusted for foreign exchange effects.
Notably, Meta Platforms acknowledged at the company’s Q2 2022 results briefing that “the pressure that we’re seeing on Q3 is overwhelmingly a macro one, where we’re seeing sort of broad-based weakness across most of the verticals.”
In the subsequent section, I look at the catalysts that might help to reverse the stock price slide that META has experienced year-to-date in 2022.
What Meta Stock Catalysts Should You Watch For?
Investors should watch for two key catalysts for META that could possibly push the company’s shares upwards in 2023.
One key catalyst relates to the monetization of Reels.
As I mentioned earlier in this article, Reels’ user engagement and revenue run rate metrics for the second quarter of 2022 have been reasonably good. More importantly, there are early signs that Reels’ rate of monetization could exceed expectations as indicated by the company’s disclosures at the recent quarterly results call.
The current revenue run rate for Reels is superior to that of Stories, based on META’s internal analysis using an apples-to-apples comparison assuming that both were introduced to the market at the same time. Also, Artificial Intelligence or AI might be a key lever that accelerates the monetization rate for Reels. As an illustration, META noted at its Q2 2022 briefing that it saw “a 15% increase in watch time in the Reels video player on Facebook” following the introduction of “a new large AI model for recommendations.”
Notably, Meta Platforms stressed at its second-quarter investor briefing that Reels “will be a tailwind on revenue but that’s not happening in 2022.” This supports my view that Reels will be a major growth driver and re-rating catalyst for META in 2023 and beyond.
The other catalyst is a much more moderate pace of hiring which will be positive for META’s overall profit margins.
At its Q2 call, Meta Platforms highlighted that the company intends “to be more focused on maintaining a lot of discipline on headcount growth as we go into 2023.” Specifically, META emphasized that its goal is to “steadily reduce headcount growth over the next year.”
I noted the sharp increase in operating costs driven by a higher number of staff was a key headwind for Meta Platforms in Q2 2022. In fact, this was the main reason for META’s -3.6% earnings miss for the recent quarter; the company’s Q2 2022 revenue was largely within expectations as evidenced by a marginal -0.5% top line miss.
Given the uncertainty associated with economic conditions for the foreseeable future, META’s focus on slowing headcount growth and optimizing expenses will put the company in a better position to deliver positive EPS surprises for 2023.
Is Meta A Good Long-Term Investment?
Meta is a good long-term investment, based on a comparison of its current valuations with its future earnings growth.
The market currently values Meta Platforms at a consensus forward fiscal 2023 normalized P/E multiple of 14.4 times according to S&P Capital IQ. This is less than half of the stock’s 10-year average forward P/E ratio of 31.5 times.
In contrast, even though investor expectations of META and other tech stocks in general are low at this point in time, sell-side analysts project that Meta Platforms will be able to achieve a decent forward four-year normalized EPS CAGR of +14.4% (source: S&P Capital IQ).
This translates into a price/earnings-to-growth, or PEG, of around 1.0 for Meta Platforms. In my view, it will be reasonable for major technology giants such as META to command a PEG multiple of between 1.5 times and 2.0 times in a more normalized market environment. As such, I view META as an excellent investment opportunity for the long run in consideration of the inconsistency between its valuations and growth outlook.
Is META Stock A Buy, Sell, or Hold?
In my opinion, META stock is a Buy. I have identified two catalysts which should bring about a positive re-rating of Meta Platforms’ share price in 2023.
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