Meta: a disappointing result, but the network remains…

Despite mixed quarterly results at the end of the first half, Meta (“Wide Moat”) saw an increase in monthly and daily active users, which demonstrates that the strong network effect the company enjoys remains intact.

Although Meta continues to focus on long-term metaverse opportunities, the company is also increasing its efforts and investments in its highly profitable advertising business to overcome the obstacles created by Apple (“Narrow Moat”) and position itself to benefit from the growing trend of short videos.

With Q1 revenue below expectations and Meta’s revenue forecast for the current quarter, we reduced our projections a bit, which lowered our fair value estimate by just 4% to $384.

We consider the stock to be attractive as it is trading at less than half of our fair value estimate.

Meta’s ongoing strategy to monetize Reels, which currently has lower ad prices, was partly responsible for the shortfall, as it caused its users’ monetization to drop slightly compared to last year.

However, we remain confident that over time Meta will increase the monetization of Reels by attracting more advertisers through its large user base spending more time on content on Reels.

As we expect Meta to continue to face pressure from policy changes at Apple, competition from TikTok, and current geopolitical and economic factors, we expect the successful monetization of Reels and investments from company in ad effectiveness and measurement improvements will enable it to return to double-digit sales growth in the second half of 2022 and beyond.

The monthly number of working people per family rose to 3.64 billion, from 3.59 billion in the previous quarter and 3.45 billion last year.

The number of daily users was 2.87 billion, compared to 2.72 billion and 2.82 billion in the fourth and first quarters of last year, respectively.

Total first-quarter revenue increased 6.6% year-over-year to $27.9 billion.

Ad revenue was up just 6.1%, largely due to decelerating e-commerce ad spend and the impact of Apple’s Application Tracking Transparency, or ATT, which made targeting advertising and effective measurement more challenging for companies like Facebook and Instagram.

Higher engagement led to a 15% increase in ads sold over last year, but given the cheaper ads in Reels and the impact of Apple’s policies on effectiveness and measurement of advertisements, the price per advertisement decreased by 8%.

We believe the company’s approaches to solving the Apple and TikTok issues will likely accelerate ad revenue growth late in the second half of this year.

Meta is tackling Apple’s problem of limiting access to detailed data, not only by helping its advertisers adopt some of Apple’s offerings such as SKAdNetwork, which provides aggregate install conversion data. applications, but also by investing in the development of its own solutions.

Regarding competition from TikTok, Meta is already seeing demand for short videos increasing on Instagram as they now account for 20% of content viewed on the app, according to management.

Given the large audience for short-form video content, we believe the return on investment for the ad format will increase, which will increase ad demand and prices.

This could either stop or reverse the slowdown we are seeing in Meta ad revenue growth.

Management expects second-quarter revenue of $28 billion to $30 billion, which at the midpoint represents no year-over-year growth.

The company now expects total spending of $87 billion to $92 billion for 2022, down from its previous forecast of $90 billion to $95 billion.

Finally, Meta expects full-year capital expenditure of between $29 billion and $34 billion.

For this year, we modeled revenue growth of 10%, an operating margin of around 32%, and assumed capital expenditures of $32 billion.

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