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Stock Analyst Update

Meta’s Q2 Earnings Show Advertising Softness and Weak Q3 Guidance; Turnaround in 2023

Reducing Meta stock’s fair value estimate to $346 from $384, but shares undervalued.

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Meta Stock at a Glance

  • Current Morningstar Fair Value Estimate: $346
  • Star Rating: 5 Stars
  • Economic Moat Rating: Wide
  • Moat Trend Rating: Stable

Meta Earnings Update

Meta’s (META) second-quarter results were again disappointing and the firm provided third-quarter revenue guidance well below expectations. However, our main takeaway from the numbers and the earnings call was that the main issue facing Facebook’s parent company is a potential downturn in the economy.

The firm’s first year-over-year revenue decline indicates demand is slowing, reflecting economic uncertainty, the impact of Apple’s data privacy changes, and increasing competition. However, we were pleased with user growth, excluding a decline in Facebook users in Europe, due in part to the Ukraine war. With continuing user growth, we believe Meta’s network effect remains intact.

Return to Top-Line Growth Expected in 2023

We expect further monetization of Reels along with an economic turnaround to return top-line growth to low- to mid-teen rates beginning in the second half of 2023. We are lowering our projections for 2022 and beyond, reducing out fair value estimate to $346 per share from $384. We continue to view this wide-moat firm as attractive.

Total revenue came in at $28.8 billion, down 1% from last year mainly due to the strong U.S. dollar. On a constant currency basis, revenue inched up 3%, which still clearly displayed softness in advertising demand. Advertising revenue (98% of total revenue) declined 1.5% year over year. Other and reality labs revenue increased 13.5% and 48.2% from last year, respectively. Operating margin declined to 29% from 42.5% due to the decline in revenue and much higher R&D and G&A expenses, only partially offset by a slight improvement in gross margin.

Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.