Meta Platforms (NASDAQ : FB, soon to be NASDAQ : META) released their earnings yesterday which was just shy of forecasts and estimates. Now the media being media, everything needs to be exaggerated to get maximum viewership hence we have headlines from CNBC which go like this,
With headlines like that, its almost as though Facebook and its entire suite of apps will be delisting from the app/play store tomorrow and that they barely have enough cashflow to support their operations for rest of the week. Judging from the ~26% decrease (as of 3rd February 2022), it would seem apparent that the only thing investors are buying into today are Fear, Uncertainty, and Doubt.
I’ll be upfront about this. I bought into Facebook today because I’ve deduced that this is a complete overreaction. Based on my deep dive into their recent earnings report, Facebook is still indeed a fundamentally strong company.
Let’s take a look at some of the key metrics from their 4Q2021 Earnings Report. (Full Press Release available here)
Facebook’s (Meta Platforms) Fourth Quarter and Full Year 2021 Financial Highlights
1. Key Metrics – EPS & Revenue
In summary, Facebook missed its EPS by 5%.
This simply means the company made less money for each share of its stock, as compared to what analysts estimated it to be.
Debatable if this is considered “weak” in any way but I believe that much of this sell-off can be attributed to the following metrics.
2. Net Income
Based on the chart above, it is apparent that Facebook is having trouble maintaining their net income which skyrocketed during Covid. Although this can be attributed to various reasons such as how their Reality Labs business unit is making widening losses quarter on quarter, other factors also come into play. A major factor would be that it is unlikely for Facebook to sustain its income as more and more countries relaxing Covid measures and less people are stuck indoors.
Simply put, the spike in income that Facebook saw in 2020 is indeed unsustainable. That on its own is starting to spook investors out.
3. Active User Metrics
Of all the metrics involved in this earnings call, the sole metric which investors seem to react most towards, is the metric involving the number of Daily Active Users (DAU).
Facebook lost around 500,000 daily users in the last three months of 2021, Meta’s quarterly earnings report revealed, falling from 1.93 billion logging in around the world each day to 1.929 billion.
Facebook Loses Daily Active Users For The First Time – Here’s Where They’re Going
This very metric is the reason why the market seems to think that the growth story for Facebook is over. All the other good news in the report doesn’t matter like how every other user metric points towards continued growth. Such is the state of the market right now where you’ll be lucky if good news gets you a lifeboat but in the case of bad news, you’ll be lucky if even one person stays on the ship.
4. Future Guidance
Unfortunately, the news doesn’t get any better from here as Facebook lowered its guidance for this upcoming quarter which we are in now.
In my opinion, this was probably the nail to the coffin as I interpret it as how it may be an indication that Daily Active Users may fall even more this quarter as revenue is expected to be lower.
Why I bought the dip?
The above summarises the earnings call. Though there are indeed other areas such as the performance of Meta Platform’s Family of Apps (Instagram, WhatsApp) which should be analysed, I think that most of the spotlight was on the metrics presented above.
That said, here are the following reasons why I bought the dip today.
1) Free Cash Flow increased by more than 50%
Every company wants to do great things but more often than not, most companies don’t even have the cash flow to do so. Hidden in their 12-page earnings report is a rather unnoticeable metric which I like to pay attention to.
This metric is even more important for a company like Facebook which is likely to lose lots of money as they continue to pour more capital back into the development of the metaverse.
This metric is the Free Cash Flow and simply put, it is the amount of money the company has left after paying off all its expenses. Literally, it indicates how much the company may have left to do whatever they want to do which in this case is to continue their venture into the metaverse.
In this case, despite everything that’s happening to them, the company still managed to increase its Free Cash Flow from $23,028,000 to $38,439,000. This represents an almost 65% increase in their year-on-year free cash flow which indicates to me that they still have a substantial amount in their warchest to deploy.
2) Strong Support at $245
From a technical analyst point of view, this is a golden opportunity as the $245 point is an excellent entry point given how it was the previous resistance turned support back in May of 2020.
From here, another robust support level would be $200. No one can really guarantee that this support level would hold but I have conviction in my chart analysis and thus have decided to take up a position here.
Moving Ahead – The future
In my previous article, I mentioned that the concept of the Metaverse is still very much at its infancy and that the road ahead would most likely be a long and painful one. Some prelude to Facebook’s recent rebranding exercise, Mark Zuckerberg mentioned in the video below that their company is presently burning lots of cash to develop this technology.
This means that at present, the company is acting as though it is hitting the reset button on its entire business model and gearing itself up for a future that is still so uncertain.
I have a 10-year investment horizon on this company and as irrational as this sell-off is, I don’t blame investors who don’t see the value in their metaverse related ventures at present.