Facebook’s parent company, Meta Platforms Inc, is set to unveil its Q4 financial figures on Wednesday, February 1, after Wall Street’s closing bell. The social media giant is expected to extend its streak of disappointing earnings reports amid intensifying competition and a severe slowdown in advertisement revenue. In 2022, Meta’s share price plummeted to a seven-year low, while the Metaverse project remains a cash black hole without any expected returns in the foreseeable future. Could the tech behemoth turn things around?

Worst in FAANG

Meta was the worst-performing FAANG stock in 2022 amid an unfavourable macroeconomic backdrop, rising competition, and a wide range of idiosyncratic risks. It is common knowledge that high interest rates inflict severe damage on tech stocks as they directly reduce the value of their future cash flows. However, Meta’s underperformance within the tech sector lies in the significant slowdown in demand for digital advertising, with the firm generating around 98% of its revenue through that source.

Despite this persistent negativity Meta’s share price managed to regain ground and stage a moderate recovery on increasing bets that the Fed will slow down its monetary tightening pace, while the firm’s historically low valuation attracted bargain hunters. Meta could potentially shine if the US economy manages to perform a soft landing, but in case of a deep recession that would deteriorate the already poor advertisement business, the firm might face even bigger troubles.

Competition heats up

Lately, Meta’s social media platforms have been struggling to increase their Daily Active Users (DAU) as their rivals such as Tik Tok and Snapchat continue to increase their acquired market share. In response, Meta developed a new type of short videos called Reels, which is essentially where Tik Tok has based its success on, but Reels have failed to monetize at higher rates than existing products like Feed and Stories.

Moreover, apart from the increasing recession fears that are constantly reducing firms’ spending for digital advertising, Apple’s latest changes in privacy settings policy have made it much harder for Meta to provide targeted advertisements to its users. This intense competition on all fronts led the firm’s revenue per user figure to decline for the first time in history in the previous two consecutive quarters, while it is not anticipated to recover in the upcoming report.

Long-term gain with short-term pain

Meta’s long-term growth plan heavily relies on the success of Metaverse in which the firm has spent an alarming amount of money without expecting to get any financial benefits soon. In order to continue funding this project, Meta has proceeded with a significant cost-cutting program, curtailing its workforce by 13% and pausing investments in all other core business segments.

Therefore, Meta seems to be stuck between a rock and a hard place as without additional spending Metaverse might never live up to its expectations, but extensive cost-cutting and zero investing towards its core business segments could cause substantial pain to the existing shareholders.

Another devastating quarter

In 2022, Meta posted a barrage of back-to-back negative earnings announcements, with its revenue and earnings per share (EPS) figures declining on an annual basis for the last two and three consecutive quarters respectively. The upcoming earnings report will likely extend this unfavorable streak.

For the fourth quarter, forecasts by Refinitiv analysts suggest that EPS is expected at $2.20, representing a massive year-on-year drop of 40.00%. Revenue is projected to increase from $27.71 billion in the last quarter to $31.48 billion, but this figure would mark an annual decline of 6.49%.

Valuation remains at attractive levels

Even though the latest rebound in equity markets pushed Meta’s valuation significantly above its recent lows, it could be argued that the stock price remains in ‘fair value’ territory, considering the firm’s growth prospects. The 12-month forward price-to-earnings ratio, which denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings, currently stands at 17.5x. This ratio is way lower than tech-heavy Nasdaq’s average multiple of 23.7x.

Undoubtedly, Meta faces substantial short-term challenges, but it’s difficult to argue that the tech firm does not retain significant long-term growth prospects. Considering that almost 40% of the world’s population is actively using at least one of the company’s platforms, which include Instagram, Facebook and WhatsApp, even a moderate success of the firm’s recently launched products and a rebound in ad segment could lead to tremendous increases in income and profits.

Can the stock price extend its rebound?

After huge growth during the pandemic, with Meta’s stock price marching to a new all-time high in 2021, last year brought persistent downside pressures. However, the share price has managed to recoup a significant part of its losses and the outcome of Q4 earnings could provide fresh directional impetus.

To the upside, solid financials coupled with optimistic guidance could send the share price towards the $155.00 support region, which might now act as resistance. Higher, the $184.00 hurdle could prove to be a tough one for the bulls to overcome.

Alternatively, if the rebound falters and the price reverses lower, the spotlight could turn to the recent support of $122.50. A break below that zone could set the stage for the seven-year low of $88.10