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Will Lower Ad Revenues Hurt Meta Platforms (META) Q3 Earnings?

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Meta Platforms (META - Free Report) has entered the worst economic downturn in the company’s history, which has affected the company’s advertising business in third-quarter 2022, set to report on Oct 26.

In the second quarter of 2022, advertising revenues (99.2% of Family of Apps revenues) decreased 1.5% year over year to $28.15 billion and accounted for 97.7% of revenues.

The Russia-Ukraine war has heightened the impact of inflation that has reduced advertising demand both within Europe and outside the region. This, in turn, might have hampered Meta’s advertising revenues in the third quarter of 2022.

Click here to know how Meta’s overall third-quarter performance is likely to be.

Meta Platforms, Inc. Price and EPS Surprise

Meta Platforms, Inc. Price and EPS Surprise

Meta Platforms, Inc. price-eps-surprise | Meta Platforms, Inc. Quote

Ad-Targeting Headwinds to Hurt Top-Line Growth

Ad targeting-related headwinds are expected to have affected the ad-revenue growth rate in the to-be-reported quarter. It is worth mentioning that changes made by Apple (AAPL - Free Report) and Google in their mobile operating systems and browser platforms have limited Meta’s ability to track the user-activity trend.

Apple’s iOS changes have made ad targeting difficult, which has increased the cost of driving outcomes. Measuring these outcomes has also become difficult. Meta expects these factors to hurt advertising growth in the third quarter and 2022.

Further impacting Meta’s top line is slowing global Monthly Active Users (MAU). In the second quarter, the firm reported roughly 3.65 billion people used at least one of their family of apps — Facebook, Instagram, Messenger and WhatsApp. For the third quarter of 2022, the Zacks Consensus Estimate for Meta's MAU worldwide is pegged at 2.97 billion.  

However, Europe DAUs and MAUs are expected to have declined in the third quarter due to the loss of users in Russia following the government’s banning of Facebook and Instagram in the country. For the third quarter, the Zacks Consensus Estimate for Meta’s MAU and DAU in Europe is pegged at 412 million MAU and 305 million DAU.

The declining ad revenues have affected Meta’s strategy to fund reality labs business segment growth with the capital generated from the advertisement business. As a result, it slowed down its investments in certain Reality Labs projects costing a lot of capital and were responsible for creating the metaverse. Meta currently carries Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the second quarter of 2022, Reality Labs revenues (1.6% of total revenues) increased 48.2% year over year to $452 million. The company has been diversifying its investments in developing certain AI infrastructure, which will drive revenue growth across ad business and the metaverse in the long run. This is expected to have aided in reducing operating expenses and might have favored the bottom-line growth in the third quarter. For the third quarter, the Zacks Consensus Estimate for revenues of reality labs business segment is pegged at $411 million.

Meta Investing in AI to Boost Top Line

Despite the company facing issues in Europe, Instagram’s growing popularity in international markets, particularly in Asia, has been helping Meta expand its user base. Much of it can be attributed to the growing popularity of short-form videos — Reels on Instagram. Reels make up 20% of the time people spend on Instagram. This new feature has been attracting Gen-Z to the platform amid competition from Snap’s Snapchat, Twitter and TikTok.

In order to increase revenues in the third quarter, Meta has been growing video monetization, especially in short-form videos like Reels, evolving their ad systems to do more with less data that will aid in reducing legal woes, which have been costing the company huge amounts of capital, and investing heavily in Artificial Intelligence (AI) and Machine Learning (ML) to support the ads infrastructure.

One of the most important factors contributing to Meta’s AI technology growth is its partnerships with PyTorch foundation co-founders NVIDIA (NVDA - Free Report) and Advanced Micro Devices (AMD - Free Report) to develop and architect the required networking system and AI models for the metaverse.

AMD has collaborated with META as an ecosystem partner to build a Metaverse-ready radio access unit (RAN). AMD’s radio chip Xilinx Zynq UltraScale RFSoC will be utilized to develop multiple Evenstar radio units (RU) to expand 4G/5G mobile network infrastructure, which is crucial for the metaverse.

Meta has collaborated with NVIDIA to build an AI research supercomputer, which is helping META AI researchers to build different AI models crucial for building the metaverse.

AI and ML are likely to help the company provide privacy-enhancing technologies and drive ad ranking and measurement capabilities.

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