Meta may be returning to its bad habits.
- Meta Platforms delivered another set of excellent results but wiped out enthusiasm by guiding weakly for Q4 2023 and raising spending expectations for 2024.
- Q3 2023 revenues / EPS were $34.2bn / $4.39 nicely ahead of consensus of $33.6bn / $3.64 where profits were driven by a 23% increase in revenues and a 7% decline in expenses.
- This latest blowout in terms of profitability demonstrates my long-held view that Meta Platforms was very bloated when it comes to expenses and I think it could probably do much more.
- The initial 5% rise in the shares was quickly reversed to a 3% decline when it became clear that the year of efficiency is clearly over coinciding with an increase in macro and geopolitical uncertainty just at the wrong time.
- First, efficiency: where Meta signalled that the year of efficiency is well and truly over now that the valuation of the shares has recovered.
- Meta has been so effective on its hiring freeze that many of the hires that were planned for 2023 will now be pushed into 2024.
- This means lower expenses for 2023 but greater-than-expected growth for 2024.
- 2023 expenses are now expected to be $87bn – $89bn down from previous expectations of $88bn – $91bn.
- However, 2024 expenses are going to grow substantially to $94bn – $99bn representing a 9.6% YoY increase.
- This is a result of investments in AI infrastructure to train and execute its AI models, hiring more skilled engineers and more investments in The Metaverse.
- I think that a better approach would be to ruthlessly continue to weed out the bloat and then reinvest that in the areas that the company has highlighted.
- This would result in flat expenses in 2024 but scope for more revenue growth as investments bear fruit.
- Given Twitter’s example, there is still a vast amount that Meta Platforms could do on cost but Mr Zuckerberg has clearly decided that he doesn’t want to do that and there is nothing that other shareholders can do about it.
- Second, Macro uncertainty: which is causing Meta Platforms to be less confident of the revenues that it is going to generate in Q4 2023 and FY 2024.
- Q4 2023 revenues are expected to be $36.5 to $40.0bn ($38.2bn) just behind the mid-point of consensus expectations of $38.9bn.
- The range is wider than is customary (especially in Q4) and reflects the increasing uncertainty or confidence that Meta has in its ability to predict its performance.
- This has been caused by increasing volatility in the performance that it has seen so far in October which has doubtless been caused by the fact that there are now 2 major wars in progress.
- This has triggered further concerns about the global economy returning to growth which in turn has caused advertisers to be more skittish about their spending plans.
- The fundamentals of the Meta Platforms business remain robust and the level of engagement by users on its properties continues to incrementally grow.
- This means that advertising revenues will eventually follow but the predictability of these revenues has decreased materially.
- A period of increasing uncertainty is precisely the wrong time to increase spending plans by 9.6% and the stage may be set for a decline in EPS after a fantastic recovery in 2023.
- It also reduces the newfound faith that Mr Zuckerberg cares about minority investors and once again the governance issue (the fact that he controls the company with a super-voting share distribution) becomes an issue.
- Hence, anyone hoping for the growth to continue into 2024 needs to think again, making this an excellent time to exit what has been one of the great stocks of 2023.
- Time to look elsewhere.
