Meta: Moving The Goal Posts
From “Meta: Appropriately Calibrated” (May 2022):
“With Meta, the market (rightly) expressed concerns about FRL, most notably the scale of investment given management’s own admission that the segment was unlikely to be a material driver of the business at any point in the current decade. With the Q1 commentary, we now have a clearer understanding of how these investments are likely to evolve over the coming years (‘the goal is to continue growing operating profits and to fund FRL through that growth of the FoA business’). Management took Mr. Market’s skepticism as a valid reason to consider an alternative approach, primarily in terms of how they communicate their long-term vision with shareholders; in my opinion, it was a much needed change and an important step in the right direction for Meta.”
That step in the right direction has proved short-lived. Following management’s most recent commentary, a more appropriate summation of what’s happened is one step forward, two steps back. On the company’s Q3 FY22 call, CEO Mark Zuckerberg said the following: “Beyond 2023, we expect to pace Reality Labs investments such that we can achieve our goal of growing overall company operating income over the long run.”
The objective is the same, but the goal posts were moved.
When that comment was made on the Q1 FY22 call, FOA generated TTM EBIT of ~$55.2 billion, with FRL reporting TTM EBIT losses of ~$11.3 billion (consolidated EBIT of ~$43.9 billion). In Q3 FY22, FOA generated TTM EBIT of ~$47.9 billion, with FRL reporting TTM EBIT losses of ~$12.7 billion (consolidated EBIT of ~$35.1 billion). For reasons I’ll discuss in a moment, the yearend FY23 figures may end up being weaker than the TTM results; said differently, management has moved the start date for the financial guardrails (“beyond FY23”) in a way that gives them the leash to be much more aggressive at FRL than what was reasonably assumed previously. (Being out of step with the financial guardrails as a result of short-term FOA business / macro headwinds is perfectly reasonable in my mind; but the decision to meaningfully ramp FRL losses throughout FY22, in addition to guiding for losses to “grow significantly” in FY23, is where I have problems.)
Simply put, I think investors were hoodwinked. Given the strategic playbook being employed at FRL and FOA, I’d argue this investment demands a level of faith / trust in management that is higher than usual; as a result, Meta management should be cognizant of what they’re asking from investors and act accordingly. In this particular instance, I’d argue they’ve failed that test in a big way. Even worse, it appears at times that management – and specifically Zuck - may be somewhat indifferent to that conclusion.
Family of Apps (FOA)
In light of a number of current pressures being navigated in the core FOA business, specifically macro headwinds, ATT, and competition for eyeballs (most notably from TikTok), the FOA business put up reasonably strong results in Q3. For the quarter, FOA revenues declined 4% as reported and were +3% YoY in constant currencies (to $27.4 billion). As shown below, the number of people globally who use one of Meta’s services on a daily basis grew 4% YoY to 2.93 billion (de-duplicated); versus pre-pandemic levels, the Family DAP metric has increased by an additional 670 million people.