10/26/2022: $META Tanked After Q3 Earnings

Cashflow was barely positive.

META 0.00 reported Q3 earnings after market close today. It was actually better than I thought. Revenue only dropped 4% YoY, beating analyst expectations. But net income dropped 52% and free cash flow went down to $173M, a 98% drop YoY. In zuck’s post earnings announcement, he told us Meta will continue to spend like crazy for the next 15 months and they might step on the brakes after that. Investors are not happy about this spending plan and stocked tanked 15+% after the announcement.

I am pleasantly surprised by their revenue numbers. It only dropped 4% YoY. It seems like messenger ads helped and it’s already a $9B ARR business across WhatsApp and Messenger. But CPM dropped 18% while ad impressions increased by 17%. I wonder if the ad impression increase is sustainable. They could make the revenue look good by serving more ads but they can only increase their ad load to a limited extent before users revolt. It’s a short term fix and they probably can’t keep pulling the same trick after a couple of quarters.

It seemed like people are mostly turned off by the expenses. The operating expenses increased by 19% and CAPEX is growing at a crazy 100% rate YoY. With the revenue drop, there isn’t a lot of justification or even rationalization of the expenses. I understand it’s important to invest into certain critical areas like AI, metaverse and the Tik Tok clone. But I hope they can give more clarity on why they choose to lose $3.67B on metaverse this quarter and to spend $9B on CAPEX. Why $3.67B and $9B? Why not $1B and $3B or $2B and $5B? Google’s Cloud Division is only losing $699M this quarter but its revenue grew 37% YoY so the loss seems justifiable as they are developing the cloud platform and acquiring customers. Google’s CAPEX is only ~$7B this quarter and their AI is probably better than Meta’s and Google’s revenue is more than 2X of Meta. How does Meta justify the aggressive CAPEX spending? Did I mention that the Facebook app is full of bugs and my friends whose accounts got hacked cannot get their accounts back? It’s apparent they are not spending a lot of money on making Facebook product experience better. At least I don’t feel it as a user.

Ultimately, the question is how Meta links spending to results. I am an early stage investor. Companies I invest in don’t spend hundreds of millions in funding until they can reasonably project the outcome. Sure, there are investors who will pour in a lot of money at the R&D or premature scaling stage but those bets mostly went bust such as Magic Leap or Iridium Phones. There are huge successes like SpaceX. But SpaceX’s funding to date is about $10B and they already dominate the rocket launching market with billions of dollars of annual revenue. In comparison, here we are seeing Meta spending $10B+ a year on metaverse with a vague idea that it’s going to be a great business at some point and people will love Meta’s products more than their competitors’. Meta ended up having to have a PR team to defend this long-term game changing metaverse investment, which tells you how little justification they really have. I hope this metaverse thing works out but I have serious doubts.