• Share prices tumbled over -30% post its 4Q21 earnings results, as investor sentiment was dampened by the earnings miss, slowing user growth, and weak guidance for 1Q22.
• However, it was not all bad news. Revenue did not miss estimates and grew fairly decently at 20% year-over-year (YoY), and management announced that good progress was made on working around the privacy changes.
• Other positives included progress on Instagram reels, with Instagram reaching the 2 billion user mark. This gives us added confidence in the potential of Instagram Reels in rising to compete against TikTok and drive user growth for Meta.
• We keep to our view that Meta’s moat in digital advertising cannot be so easily overthrown and that headwinds from the rising competition and Apple privacy changes will be overcome.
• Trading at 14X PE based on 2023 earnings, as of 11 February 2022, the upside potential of 65% to target price of USD 380 for Meta Platforms (NASDAQ: FB) is attractive.
The past week has been rough for Meta platforms (NASDAQ: FB) with its share price tumbling over -30% post its 4Q21 earnings results (Figure 1). This decline has come about as investors were spooked by the earnings miss, slowing user growth, and weak guidance for 1Q22.
Figure 1: Meta’s share price plummeted after it announced results for 4Q21
Despite the poorer than expected results, we are confident that Meta will be able to overcome the headwinds and maintain its digital advertising strength.
What happened for Meta in 4Q21
During the latest earnings call on 3rd February 2022, markets were taken aback by the bad news, which included firstly, the 4Q21 earnings miss of -4.2%. Meta’s poor performance sticks out like a sore thumb among the stellar earnings beat by the other big tech companies (Table 1).
Table 1: 4Q21 earnings results of US big tech
| 4Q21 | Actual EPS | Consensus EPS | % beat/(miss) |
| Meta | 3.67 | 3.84 | -4.2% |
| Apple | 2.10 | 1.24 | 69.6% |
| Amazon | 4.89 | 3.77 | 29.7% |
| 30.69 | 27.47 | 11.7% | |
| Microsoft | 2.48 | 1.92 | 29.4% |
Secondly, slowing user growth with daily active users stagnating (Figure 2) further exacerbated fears that Meta’s apps are losing popularity among users, especially those from the younger generation.
Figure 2: Growth in Meta’s daily active users across its family of apps are starting to stagnate
Adding to the woes is the weak guidance for 1Q22 which further dampened sentiment. Management cited headwinds such as Apple’s (NASDAQ: AAPL) privacy changes, regulatory changes, and the rising competition from TikTok.
Revenue growth is estimated to be in the range of +3-11% YoY for 1Q22, way below estimations. Assuming this guidance materialises, it would be the slowest growth Meta would post across its history, just behind 2Q20 which was affected by the onset of covid-19 (Figure 3).
Figure 3: Meta’s revenue growth rates would be slowest in 1Q22 according to guidance
However looking closer, it is not all bad news.
Some of the positives are first, revenue did not miss consensus estimates, growing 20% YoY in 4Q21 (Figure 3), which is the same rate the advertising business was growing at in 4Q19 before the pandemic hit. This shows that the advertising business is not severely impacted but still demonstrates growth amid the headwinds of Apple privacy changes and rising competition.
Secondly, management announced that progress has been made for Instagram Reels (short videos) and the commerce initiatives, which we discuss in the next section. Thirdly, record share buybacks of about USD 20 billion in 4Q21 are good news for shareholders as it is possibly a sign that management thinks the stock is undervalued.
Our take on 4Q21 results is that the earnings miss reflects the increasing spend on building up the Metaverse and that the advertising business is still fairly resilient amid the headwinds, as seen by the 20% YoY revenue growth in 4Q21.
Meta to overcome headwinds and maintain its digital advertising moat
Although 1Q22 might pose slower revenue growth of +3-11% YoY, we keep in mind the high base effect as 1Q21 enjoyed strong advertising growth accelerated by covid-19. Moreover, we remain optimistic about the progress of Meta’s effort to work around Apple’s privacy changes and initiatives to grow its user base amid rising competition, which in turn will drive the recovery in revenue and earnings growth.
Meta’s digital advertising moat comes from its unique offering of targeted advertisements based on user interest and demographics. Such targeted advertisements get the most relevant ads to users and hence most likely respond to the ad.
Google (NASDAQ: Alphabet) on the other hand does not have such user data, and the thus their advertisements are usually search or banner advertisements that rely on what people search for, rather than targeted advertisements that use data that profiles users.
Both have their place and cannot replace one another, hence we believe that Meta’s moat in digital advertising cannot be so easily replaced and that headwinds from the Apple privacy changes will be overcome.
What drives Meta’s moat, is its large network and data of its users. Meta has the largest user base and can profile users according to demographics, interests, and interactions with friends, which makes them one of the best platforms for targeting advertisements (Figure 4).
Although the user numbers in 4Q21 results were disappointing with barely any growth, it is heartening to see that Instagram has hit the 2 billion users mark. And according to data from Sensor Tower, Instagram is the most downloaded app in 4Q21, taking TikTok’s #1 position in-app downloads which it had held since 4Q19.
This gives us added confidence in the potential of Instagram Reels in rising to compete against TikTok, which is popular among young adults, and drive user growth for Meta.
Figure 4: Meta’s family of apps has the largest number of users
On top of Instagram Reels, the other initiatives such as Whatsapp business and payments, and Facebook shops which are on the e-commerce front, are added upsides that could drive user growth and engagement, as well as new monetisation forms. Hence, we are not too worried about the slowing user growth seen in 4Q21.
Regarding the changes in Apple’s privacy setting, Meta is finding ways to work around them and to enhance ad targeting and measurement. Meta’s management shared during the 4Q21 earnings call that the company has made real progress in the workaround efforts and will continue to make progress ahead.
For example, one of the ways is moving more signal onsite, through offering more advertising products such as “click to message ads”, and “shop ads”. These advertisements lead users to Meta’s messaging platforms or the Instagram shop page. With more signal onsite, Meta can gain data of users’ purchases and e-commerce activity, which further increases their ad targeting effectiveness.
Putting it together, as Meta is in this stage of transition, near-term revenue and earnings growth may take a hit, but longer-term, we expect Meta to emerge stronger and deliver growth.
Moreover, Meta’s investment in the Metaverse would poise the company ready for the future as users seek advanced digital experiences. According to Apptopia, in 4Q21, Meta’s virtual reality (VR) Oculus app download more than doubled from the previous few quarters, up to around 4.5 billion.
Key investment risks
Tough competition: TikTok has been a major competitor in the social media arena, and its growing popularity with younger users is something Meta is struggling with. However, Meta is working on plans to acquire more young users such as its new addition of Instagram Reels. Competition in the AR/VR space is also heating up with Meta facing up against Apple, Microsoft, Google, Snap, etc.
Worse than expected headwinds: A longer and more severe than expected impact from the Apple privacy changes, as well as the more than expected expenses on the Metaverse, could lead to further earnings misses. This would dampen investor sentiment and send the share prices down.
Inflationary risk: In an inflationary environment, firstly, we can expect interest rate hikes. Higher interest rates could result in a lower valuation of Meta’s stock. However, we think that with strong earnings performance, Meta should continue to do well.
What should investors do?
Trading at 14X PE based on 2023 earnings, as of 11 February 2022, the upside potential of 65% for Meta Platforms (NASDAQ: FB) is attractive (Table 2). Given the attractive upside and long-term growth potential of Meta, we remain optimistic about the company but would caution investors of the potential volatility in the share price given the near-term risks.
Nevertheless, long-term investors with an appetite for risk can consider picking up shares at depressed prices, and build up their position in the event that prices fall further. Taking a conservative approach to reflect the higher expected expenses and slower revenue growth, we lowered our earnings estimates and hence our new target price is USD 380, based on 2023 earnings per share.
Table 2: Earnings table
| 2020 | 2021 | 2022E | 2023E | |
| EPS | 10.1 | 13.8 | 14.3 | 16.4 |
| Earnings Growth | 57% | 36% | 4% | 15% |
| PE Ratio | – | 16.5 | 16.0 | 13.9 |
| Upside Potential | – | – | 44% | 65% |
| Source: iFAST estimates, Bloomberg Finance L.P.Data as of 11 February 2022 |