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Earnings preview: Is there a turnaround opportunity in Meta’s shares?

Meta

Facebook parent, Meta Platforms Inc., is set to report the third-quarter earnings after the US markets close on Thursday, 27 October. The world-largest social platform’s shares tumbled 63% year-to-date due to macro headwinds and a sharp decline in its revenue growth due to weakened advertising demands. However, with a low price-to-earnings ratio of 12, a beat on already lowered expectations for its earnings may provide a rebound opportunity in Meta’s shares.

Revenue growth is expected to continue declining

In the second quarter, Meta Platform’s Daily Active Users (DAU) increased by 1.97 billion, or a 3% growth year over year; Its revenue came in at $28.82 billion, or a 1% drop from a year ago, following a 7% growth in the first quarter, which was also the first single-digit growth in three decades. Its earnings per share in the second quarter were also disappointing, reporting at $2.46, or a 32% annual decline. Weakened advertising demands, Apple’s iOS privacy change, and fierce competition from TikTok are the major issues that the company is facing. Plus, investors are extremely uncertain about its newly developing Metaverse business’s future, though the social media giant still had $12.7 billion in cash according to its second-quarter earnings report.  

According to Zacks Consensus, Meta platform’s third-quarter earnings per share will be at $1.82, or a 43.5% decline from a year ago, and the revenue is expected to be at $27.44, or a 5.4% decline year over year suggesting that both of which may have an even steeper decline in the third quarter. However, a beat on such negative earnings expectations may offer a surprise upside bullish factor since the company’s valuation is only 12X.

Also, Meta’s slowdown may have already been priced in, with the shares dropping 8% since the company announced its first-time-ever reduction in headcount, along with sweeping plans to reduce costs across most teams on 30 September.

Meta’s Quest Store sales may continue to grow

Despite the controversial metaverse development, Meta’s The company has surpassed a milestone of $1.5 billion in purchased VR content, with the average monthly store revenue increasing from $50.6 million to nearly $60 million since its last milestone of $1 billion, according to the company's update on 18 October. 

CEO Mark Zuckerberg debuted the Meta Quest Pro VR headset for $1,100 earlier this month, which was a sharp price increase from its Quest 2 headset of $400. Microsoft CEO Satya Nadella also joined the events to discuss a collaboration with the software giant’s app Teams, which indicates a potential further growth in Meta’s VR business. The above was seen as negative during the event, with shares dropping 2.4% on the day. But this could be also seen as positive for its future growth in the long term.  

Technical Analysis

Meta Platforms, daily

Directional bias – neutral 

Source: CMC Markets as of 25 October (Click to enlarge the chart)

Meta Platform’s shares are flirting with their lowest level since 2018, with pivotal support at 122. The trading volume has picked up significantly from the last two days, with prices bouncing off the day-lows, suggesting that traders may be betting for earnings beat for its Q3 performances. In the last two earnings reports, a pickup in volume both led to a price jump in its shares. The stocks’ near-term resistance could be at the 50-day MA around 149, then 185, which is the 23.6% retracement of Fibonacci. But on the flip side, a breakdown below 122 may take Meta’s shares to further down and test the 100 support level. 


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