Cramer's Investing Club: As Facebook misses — tanking shares — we're keeping our small position

Published Wed, Feb 2 20228:17 PM EST

Investing Club holding Meta Platforms (FB), formerly named Facebook, reported mixed fourth-quarter results after the closing bell Wednesday. While revenue at the tech giant came in better than expected, aggressive investments in augmented/virtual reality pressured overall profitability, while changes to Apple 's iOS user tracking policy continued to hurt ad targeting and measurement. The stock sank more than 20% in after-hours trading following the report. Bottom line While we like to see companies investing in future growth, and do have high hopes for Meta's metaverse ambitions, the results Wednesday evening were nonetheless disappointing as the aggressive investments resulted in lower-than-expected earnings — something investors are simply unwilling to forgive against the backdrop of inflationary concerns and expected multiple Federal Reserve interest rate hikes. Intensifying competition combined with the prior changes to Apple iOS and the transition to monetizing Reels from Feed and Stories are clearly taking their toll and materialized this quarter in the form of a disappointing revenue guide. Having successfully navigated the changes from desktop Feed to mobile Feed, and Feed to Stories to Reels, we think management will be able to pull off the transition again. However we understand that it creates a near-term headwind we have to be patient about. We have kept our 2-rated FB position very small, favoring 1-rated Alphabet (GOOGL) over it because of the latter's much cleaner story oriented around cloud growth and a more limited impact from the Apple's iOS tracking changes. That said, the severe after-hours drop in Meta shares could get us more interested — but for now, we are holding off from upgrading our rating. We'll have more to say Thursday on our Morning Meeting video livestream for Club members at 10:20 a.m. ET. Companywide results On the top line, revenue of $33.671 billion (+20% YoY) outpaced the $33.191 billion expected. However, on the bottom line, diluted earnings of $3.67 per share (-5.4% YoY) missed the $3.81 the Street was expecting. As a reminder, beginning this quarter, Meta introduced a new earnings format, now reporting results in two segments: Family of Apps , which includes Facebook, Instagram, Messenger, WhatsApp and other services; and Reality Labs , which includes augmented and virtual reality related consumer hardware, software and content. Due to the change, we do not have apple-to-apples comparisons for the results versus expectations for every line item. However, we will provide what we do have and back into what we can. Within Family of Apps, advertising revenue of $32.64 billion outpaced expectations of $32.5 billion while other revenue came in at $155 million. Reality Labs revenue came in at $877 million. While we don't have an exact estimate for Reality Labs expectations, this was a beat versus implied expectations as the Street was looking for a combined sales from other (in Family of Apps) and Reality Labs to come in at $829 million. As for profitability, Family of Apps operating income came in at $15.889 billion (+6.8% YoY) while Reality Labs reported an operating loss of $3.304 billion. Combined, Meta reported total operating income of $12.585 billion, a miss versus expectations of $13.042 billion. Finally, Meta repurchased $19.18 billion worth of shares in the quarter, bringing the FY2021 total to $44.81 billion, and ended the quarter with $48 billion in cash, cash equivalents and marketable securities. Engagement Taking a look at Facebook specific engagement metrics: Facebook Daily Active Users (DAUs): 1.929 billion (+4.6% YoY) vs. 1.949 billion expected Facebook Monthly Active Users (MAUs): 2.912 billion (+4.1% YoY) vs. 2.911 billion expected Facebook DAUs/MAUs: 66%, consistent with the level seen since 2Q 2020 Facebook Global Average Revenue per User (ARPU): $11.57 (+14.1% YoY) vs. expectations of $11.41 per user Notably, Facebook ARPU was up across all geographies, advancing 13.1% YoY in the U.S. and Canada, 16.7% YoY in Europe, 20.7% YoY in Asia-Pacific, and 23.8% YoY for Rest of World. As for Family engagement metrics, which more broadly represent engagement across Facebook, Instagram, Messenger, and/or WhatsApp, the results were as follows: Family Daily Active People (DAP): 2.82 billion (+8.5% YoY) Family Monthly Active People (MAP): 3.59 billion (+8.8% YoY) Family DAP/MAP: 79%, largely in line with the rate we've seen over the past seven quarters Family Global Average Revenue per Person (ARPP): $9.39 (+8.9% YoY) Notably, management commented on the release that ad impressions across the Family of Apps were up 13% YoY and that the average price per ad was up 6% YoY. Commentary on advertising targeting Notably, Apple's iOS tracking changes do not appear to be impacting all companies in the same way. On the call, Meta management took some time to discuss the divergence seen between Google-parent Alphabet's e-commerce results and their own — where Meta saw "a meaningful slowdown in growth." Management commented, "Given that we know that e-commerce is one of the most impacted verticals from iOS restrictions, it makes sense that those restrictions are probably part of the explanation for the difference between what [Alphabet was] seeing and what we were seeing. And if you look at it, we believe those restrictions from Apple are designed in a way that carves out browsers from the tracking prompts Apple requires for apps. And so what that means is that search ads could have access to far more third-party data for measurement and optimization purposes than app-based ad platforms like ours. So when it comes to using data, you can think of it that it's not really apples-to-apples for us. And as a result, we believe Google search ad business could have benefited relative to services like ours is based a different set of restrictions from Apple. And given that Apple continue[s] to take billions of dollars a year from Google Search ads, the incentive clearly exists for this policy discrepancy to continue." Guidance Moving on to guidance, the company expects total revenue in the first quarter of 2022 to be in the range of $27 billion to $29 billion (+3% YoY to +11% YoY), a big miss compared to estimates of about $30.18 billion. Management cited a few headwinds impacting impression and price growth. On impressions, they expect continued headwinds from both increased competition of people's time and a shift of engagement within their apps towards video like Reels, which have lower monetization rates compared to Feed and Stories. On pricing, growth is being negatively impacted by three factors. First, the company is lapping a period in which Apple's iOS changes were not in effect, and they are anticipating "modestly" increasing ad targeting and measurement headwinds from platform and regulatory changes. Second, they are lapping a period of strong demand in the prior year, and management said they are hearing from advertisers that cost inflation and supply chain disruptions are impacting advertiser budgets. Lastly, foreign currency is expected to be a headwind to year-over-year growth. On the expense side, management lowered its full-year 2022 expense outlook to the range of $90 billion to $95 billion from the range of $91 billion to $97 billion. Management's capital expenditure outlook was unchanged at $29 billion to $34 billion. On the call, the team highlighted several key investment including Reels, community, messaging, commerce, ads, privacy, AI, and of course the metaverse. (Jim Cramer's Charitable Trust is long FB, AAPL and GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Facebook's new rebrand logo Meta is seen on smartpone in front of displayed logo of Facebook, Messenger, Intagram, Whatsapp and Oculus in this illustration picture taken October 28, 2021.

Dado Ruvic | Reuters

Investing Club holding Meta Platforms (FB), formerly named Facebook, reported mixed fourth-quarter results after the closing bell Wednesday.