Meta Platforms Inc. (NASDAQ: Meta) is a technology giant and the current leader of the Metaverse. However, a significant increase in capital expenditures and declining revenues could put META in financial trouble in the short term.
decreased income, Increased expenses
Meta’s third quarter 2022 financial report showed revenue of US$27.7 billion, down 4% compared to the same period last year. As a result, after peaking at $33.7 billion in the fourth quarter of 2021, Meta’s revenue has been declining since.
The main reason is the gradual decline in advertising revenue, reaching $27.2 billion, down nearly 4% compared to the same period in 2021. The downward trend occurred in a context of high inflation, which also caused many companies to cut their advertising spending. Due to Apple’s privacy changes. Not to mention how fast Tiktok is Growth and its market share hurt Meta. In addition, reality lab continued to report negative results, with revenue of just $285 million, down 49% year-over-year.
Despite lower revenue, cost of revenue increased to $5.7 billion, representing 21% of total revenue. As a result, gross profit in 2021 was just US$22 billion, down 6% from the previous year.
Apart from an increase in cost of sales, both selling, general and administrative expenses and research and development expenses increased in line with the decrease in revenue. During the same period, selling, general and administrative expenses increased his 8% to over US$7 billion. This may be why Meta announced layoffs of his 11,000+ employees. Additionally, R&D spending increased from $4 billion in the first quarter of 2020 to nearly $9 billion in the third quarter of 2022, accounting for 33% of total revenue.
The heavy investment in research and development is also reflected in capital spending, which is expected to reach $9.4 billion by the end of the third quarter of 2022, including finance leases. This can also be seen on the balance sheet, where Meta’s net worth, factories and equipment have steadily increased over the years, reaching $87.3 billion by the end of September 2022, accounting for his 50% of total assets. .
Meta has invested tens of billions of dollars in the design and development of the Metaverse. Regarding Reality Labs, Meta reported a loss of $3.6 billion in the third quarter of 2022. This loss he expects to continue increasing in 2023. The company expects its increased investment in Reality Labs to lead to increased revenue over the long term. .
As a result, Meta’s net income for Q3 2022 was just $4.4 billion, down 42% from the same period last year, despite lower revenue and a sharp rise in all expenses. As a result, diluted earnings per share were just $1.64, down 49% compared to the same period last year, indicating significantly lower profitability per share.
Despite investing heavily in assets, especially the Metaverse, Meta does not appear to be profitable. Profit margins such as gross margin, net margin, and operating margin are declining, demonstrating inefficiencies in Meta’s ability to convert revenue into profit.
Moreover, Meta’s ROE (Net Income/Equity) and ROA (Net Income/Total Assets) decreased to 3.54% and 2.46%, respectively. The reason for this was that while net income decreased significantly, equity capital and total assets increased, indicating that the company’s ability to generate profit for its shareholders from its business activities also declined.
That’s because, according to the DuPont formula-based ROE analysis, the net profit margin declined significantly from 81.7% in Q3 2021 to 72.3% in Q3 2022. Sales (Revenue/Total Assets) decreased. This indicates that Meta’s ability to generate income from its assets is declining. The good news is that Meta applies minimal financial leverage, resulting in a low leverage ratio even when the market is rising.
Excess cash and short-term investments
Cash and short-term investments are at an all-time high as of September 30, 2022, reaching $41.7 billion, or 23% of total assets. As a result, the cash ratio (cash and short-term investments/current liabilities) and the current ratio (current assets/current liabilities) were also higher, resulting in a larger proportion of cash and short-term investments. This demonstrates Meta’s liquidity, creditworthiness, and ability to meet short-term obligations. Therefore, the meta could work if the global economy plunges into recession and inflation remains high.
Specifically, in terms of cash flow, free cash flow per share decreased in the third quarter of 2022 to US$0.12 compared to US$3.46 in the same period last year. With one quarter of 2022 remaining, free cash flow TTM per share has declined in line with 2021, but remains higher than 2020.
Cash and cash equivalents and accrued expenses also decreased. Specifically, after peaking at 5.27 at the end of 2021, this indicator plummeted to 0.9 at the end of September 2022. The reason for this was that cash and cash equivalents declined slightly before recovering, while accrued expenses increased significantly for his third consecutive quarter to near zero. $16 billion. As such, future-looking financial obligations are expected to be even higher.
In terms of multiple valuations, Meta’s P/E Non-GAAP FWD is 9.99, lower than the sector median of 14.48. The P/E Non-GAPP TTM was 8.65, 26.5% lower than the industry average. However, the PEG Non-GAAP FWD is 3.47, which is 203.14% higher than the industry average of 1.15. Additionally, Meta’s FWD Price/sales and TTM Price/sales rose to 2.07 and 2.09 respectively, higher than the industry average of 75.42% and 76.64%. This shows that the stock market price of Meta looks higher than the sector relative to earnings.
Meta has experienced a recent sale, with market prices dropping more than 64% from its peak in September. It currently has a market capitalization of approximately $359 billion and an enterprise value of approximately $343.89 billion. Therefore, metamarket stock prices are relatively higher than their intrinsic value.
In the context of a pessimistic economy and stiff competition in the industry, there are no positive prospects for Meta in 2023. According to their plans, capital spending, including finance leases, is expected to reach $32 billion to $33 billion in 2022. By 2023, data center, server, and network infrastructure capital expenditures are projected to float between $34 billion and $39 billion. The company hasn’t provided a positive earnings forecast for his 2023, though the total cost will be between $96 billion and $101 billion.
The pursuit of the Metaverse has led Meta to spend a lot of money on research and development, but the field has yet to turn a profit. In addition, Tiktok’s fierce competition, the tendency to cut advertising costs during an economic slowdown, and Apple’s privacy changes in iOS have reduced the company’s revenue. Looking ahead to 2023, with total costs from his $90 billion to his $100 billion, free cash flow per share declining, there are no encouraging signs. As a result, we expect Metaverse’s share price to continue to decline after its fourth quarter earnings report (expected after the market close on February 1) and into 2023. It would be nice if the metaverse project provided a clearer signal. However, it should be noted that although Meta spent more in research and development in its fiscal year, it could create commercial advantages in the long run.
Co-author, Xuan Hoai.