Meta Q3 earnings preview: Where next for Meta stock?

When will Meta release Q3 earnings?

Meta is scheduled to release third quarter results after the markets close on Wednesday October 26. A conference call will be held by management on the same day at 1400 PT (1700 ET).

Meta Q3 earnings consensus

Meta’s guidance for the quarter is for revenue of $26 billion to $28.5 billion. Wall Street forecasts the company will report a 5.4% year-on-year drop in revenue in the third quarter to $27.44 billion and adjusted EPS is expected to plunge 41% to $1.88.

Meta Q3 earnings preview

Meta was one of the first casualties in the tech space this year, with shares having gradually lost ground since falling off a cliff back in February when it revealed it shed daily users for the first time in its history, sparking fears that Facebook and its other apps are already near their peak.

Up until recently, markets had expected user numbers to climb in the second half of 2022 but estimates have been curtailed ahead of the results this week and Wall Street now forecasts that Daily Active Users (DAUs) will fall to 1.86 billion in the third quarter from the 1.97 billion it had in the second. Notably, they believe this will rebound to 1.87 billion in the fourth.

(Source: Estimates from Bloomberg)

CEO Mark Zuckerberg said back in July that the disappointing outlook for this quarter was driven by the ‘continuation of the weak advertising demand environment’, which is being driven by ‘broader macroeconomic uncertainty’. This is supported by the fact other social media firms such as Snap and Twitter have also struggled to impress the markets. One of the reasons that Wall Street has pulled back its estimates on Meta so sharply ahead of the results was the poor showing last week from Snap, which reported its slowest revenue growth on record.

With a recession looming around the corner, the environment is set to remain challenging for the foreseeable future. Eyes will also be on the revenue guidance for the final quarter of 2022, with analysts looking for Meta to target a figure of around $27.4 billion. Notably, that figure has been drastically cut from $32.5 billion less than two weeks ago.

Prices have also suffered since it became more difficult for social media apps to target adverts at iOS users after Apple introduced changes to its policy last year, which has ultimately reduced the effectiveness of their ads. Bloomberg Intelligence claims this will knock around $10 billion off Meta’s annual revenue this year alone. Meanwhile, there has also been an impact from Meta’s pivot to less lucrative short-form videos and ‘Reels’ from longer-form videos in the hopes it can compete better with the likes of TikTok and YouTube.

We have already seen Meta press pause on new hiring and announce it is reducing its headcount for the first-time ever in response to much tougher conditions, with Zuckerberg warning in the last quarter that the company needs to ‘get more done with fewer resources’. That is in the hope of getting a grip on costs. Meta has said total costs will be in the range of $85 billion to $88 billion this year – up to 24% higher than in 2021.

Lower user numbers, softer demand and pressured pricing will all contribute toward the second consecutive quarter of lower revenue while the weaker topline combined with rising costs will also lead to a fourth consecutive quarter of lower earnings. Analysts are also expecting this to result in quarterly operating cashflow falling to its lowest level in two years to just $10.4 billion, marking a sharp decline from what we saw during the first half.

Meta has bet its future on the metaverse and recently held its annual event to showcase the latest developments, headlined by its new premium Quest Pro mixed-reality headset that Zuckerberg said will allow ‘entirely new categories of things getting built’. The new headset is targeted at professionals such as designers and creative professionals and will be launched this week at a price of $1,500. This will allow Meta to target the high-end of the market and the device should compliment its existing Quest 2 headset that dominates the consumer market with a focus on gaming.

However, Meta is years away from seeing any form of return from its costly metaverse ambitions, having sunk over $16 billion into its efforts since the start of 2021 alone, and the business will continue to be driven by advertising on social media for years to come. With this in mind, a pullback  in spending here could provide a way of delivering savings without impacting the core business, although this would put its hopes of spearheading the metaverse at risk. 

(Source: Estimates from Bloomberg)

Where next for Meta stock

Meta shares fell to their lowest level in almost four years earlier this month at $122.50, which pushed the RSI to the cusp of oversold territory and proved to be low enough to attract buyers back into the market.

This needs to hold to avoid opening the door to a sharper fall toward $114, which held as a firm floor throughout late 2016. If there is a sharper drop, like we saw with Snap, the stock could fall toward the level of support seen in the first half of 2016 at $109.

The first upside target is $139.75, marking the pandemic-induced low we saw in March 2020 that has proven a tough ceiling to crack over the past month. From here, it can look to recover back above the $155 mark for the first time in six weeks before targeting $172.50 and then $183.85.

The 57 brokers that cover Meta have an average target price of $209, implying there is over 60% potential upside from current levels. However, we have seen this drop dramatically as earnings estimates have been curtailed considering the target price was over $277 just three months ago.

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