Source: PaxForex Premium Analytics Portal, Fundamental Insight
Unlike most major tech companies, Meta Platforms stock has surged after its recent earnings report.
Facebook's parent company didn't report particularly strong numbers. Revenue for the quarter tumbled 4% to $32.2 billion, and earnings per share fell 52% to $1.76, though when adjusted for restructuring costs, earnings per share fell 18% to $3, which was better than forecast.
Looking ahead to Q1, the company expects another modest decline in revenue, a sign of macroeconomic headwinds in the advertising market and its decision to ramp up its Reels short-form video product, which is monetized at a lower rate than other "surfaces" such as news feeds and stories.
But there was something else notable in the report and accompanying earnings call.
CEO Mark Zuckerberg shifted his attention to the company's core business, a family of apps consisting of Facebook, Instagram, WhatsApp, and Messenger.
Under Zuckerberg's leadership, the company transformed just over a year ago, changing its name from Facebook to Meta Platforms, signaling that the metaverse would become a core business.
Around the same time, the company changed its financial reporting structure, separating Reality Labs, the division that makes Oculus VR headsets and deals with the metaverse, from the app family segment. The move also showed that Reality Labs was a smoldering money pit, and things have only gotten worse since then. Reality Labs lost $4.3 billion in Q4, ending a year in which it lost $13.7 billion.
As a seasoned politician, however, Zuckerberg seems to have learned that the best way to deal with bad news is to shift focus. That's exactly what he seems to be doing in this case.
During the earnings call, the company talked about its investments in artificial intelligence (AI) and initiatives to cut costs and improve efficiency, such as a more cost-effective data center architecture. In the report, the company noted that almost all of its capital expenditures, which mostly go to data centers, are for the app family, not Reality Labs.
Zuckerberg's opening remarks in the earnings release also made no mention of Reality Labs, saying: "The progress we're making on our AI discovery engine and Reels is a major factor in that. Beyond that, our management theme for 2023 is 'The Year of Efficiency,' and we are focused on becoming a stronger and more agile organization."
The head of Meta discussed the company's recent work in the metaverse during the earnings call, but it seemed to take a back seat to Meta's other projects when he summarized the company's priorities, saying: "Okay, here are the areas we're focusing on: AI, including our discovery engine, advertising, business messaging and increasingly generative AI, as well as future platforms for the metaverse."
Meta is by no means abandoning its metaverse plans. In fact, late last year it released Quest Pro, its newest headset.
However, there are a number of reasons why Zuckerberg seems to have returned to the core business. The metaverse project has so far failed, not just at Meta, but elsewhere as well. The value of the accompanying market of NFTs has plummeted, and the idea that people want to spend time in virtual worlds has yet to gain traction, while public interest in the metaverse also seems to have evaporated after Zuckerberg initially made it a hype. The struggles of the metaverse are also noticeable in the recent attention given to ChatGPT and generative artificial intelligence, which seem to be transformative technologies that actually have practical applications.
Perhaps Meta's CEO is also reacting to the sharp decline in the stock. The stock fell about 75% in the year after the company changed its name to Meta, and part of the reason was investor fear that Zuckerberg would risk the entire business for his metaverse experiment.
He seems to have convinced investors that this is not the case, which is partly why the company's stock has soared. The company plans to steadily increase overall profits while investing in Reality Labs. It's a reasonable plan, and it doesn't overshadow Meta's highly profitable digital advertising business.
Metaverse will continue to shine red ink on reports, but after Zuckerberg's encouraging speech, investors are looking at the company through rose-colored lenses. If the advertising business can return to growth, which seems likely with Reels, the company's stock should continue to rise.
As long as the price is above 155.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 180.70
- Take Profit 1: 196.00
- Take Profit 2: 220.00
Alternative scenario:
If the level of 155.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 155.00
- Take Profit 1: 141.00
- Take Profit 2: 124.00
