Meta Q1 Earnings Preview: Underperformance To Continue As User Growth Slows

The recent performance of social media giant Meta Platforms' (NASDAQ:FB) stock shows that investors are expecting another disappointing quarter when the Facebook parent reports its Q1 earnings tomorrow after the market close. The stock closed Monday at $186.99.

FB Weekly Chart

The stock of the Menlo Park, California-based company has been among the worst performers on the tech-heavy NASDAQ 100 this year, falling more than 40%. Furthermore, the company lost about $500 billion in market capitalization since its September peak, when it hit a record high of $384.33.

This historic selloff came after Meta produced highly disappointing earnings in February, signaling to investors that it had lost its ability to expand its core business. For the first time ever, Facebook’s user base stopped growing. It even shrank in some markets.

The company, which owns Facebook, Instagram, and WhatsApp is also reportedly struggling to find solutions for Apple's (NASDAQ:AAPL) latest privacy settings options, which gave users the choice to stop apps from tracking their internet activities. Estimates are that these changes could cost Meta some $10 billion this year, or about 8.5% of its 2021 revenue.

Cheaper Than Many Value Stocks

Heightened competition and regulatory risks make it even more challenging for investors to feel confident about Meta’s future outlook.

However, after the steep selloff, Meta stock now trades for less than 15 times the estimated earnings, making it cheaper than many value stocks. That’s never happened before in Meta’s tenure as a listed company.

That’s why most of the 59 analysts surveyed by Investing.com give Meta a buy rating.

FB Consensus Estimates

Source: Investing.com

Their consensus price target for the next 12-month period implies a 67.82% upside potential.

Similarly, according to several financial models like those that value companies based on P/E or P/S multiples or terminal values, the average fair value for Meta stock on InvestingPro stands at $350.27, implying more than 90% upside potential.

Despite these bullish forecasts, we caution investors that CEO Mark Zuckerberg and his team have a challenging road ahead in order to put the company back on a growth trajectory. The most significant headwind the company currently faces is attracting young users that find FB competitor TikTok more useful.

In addition, there is a lack of visibility on Zuckerberg’s metaverse shift. We don’t know how long it will take for this massive undertaking to pay off. Meta’s Reality Labs, which is giving shape to the company’s metaverse ambitions, lost $10.2 billion in 2021. These challenges could continue to keep Meta stock depressed in the short run.

Bottom Line

Meta’s short-term earnings outlook remains clouded by many uncertainties, including slowing user growth, change in Apple’s privacy settings, and a vast spending bill on its metaverse venture. Nonetheless, Zuckerberg has an excellent track record of exceeding expectations and producing robust returns for his investors during the past decade.

Meta, in our view, is a bet for buy-and-hold investors who believe in the company’s new direction. It could pay off in the long run.