Facebook's stock surge on strong earnings shows our faith in Mark Zuckerberg was not misplaced

Published Wed, Apr 27 20228:25 PM EDTUpdated Wed, Apr 27 20228:37 PM EDT

Meta Platforms (FB), formerly named Facebook, reported mixed first-quarter results after the closing bell Wednesday. However, while revenue missed, key engagement metrics came in better than expected and so did earnings. During the call, management provided highly encouraging commentary on expenses, monetization and longer-term profit potential. They said they also expect revenue growth to reaccelerate over time. Meta Platforms, a Club holding, surged more than 18% in after hours trading. However, it still has a long way to go to get back in the green for 2022. That post-market jump to around $207 per share would still be a year-to-date decline of more than 38%. Bottom line While quarterly revenue missed expectations and adjusted per-share earnings beat, operating income was strong. That's important because it serves to ease investors' concerns regarding engagement. Daily active users (DAUs) in Q1 bounced back to an all-time high, following a slight decline in the prior quarter, which at the time of its release in February slammed the stock 26% in its worst day ever. While the fourth-quarter decline in DAUs was minimal, it was the first reported decline in the company's history and caused some investors to conclude wrongly in our view that Meta Platforms' best days were behind it. At the time , Jim Cramer said he had "total faith" in CEO Mark Zuckerberg 's vision for the company. The just-reported first-quarter results show that his faith in Zuckerberg was not misplaced. In addition to positive updates on engagement, the conference call was everything an investor could have hoped for. Management said all the right things. They again acknowledged the ad targeting headwind posed by Apple 's privacy updates. They talked about the monetization headwind from increased engagement with Reels — the short form, TikTok-like videos that monetize at a lower rate than other forms of advertising. Management also acknowledged a need to adapt to the operating environment. On the call, the team said that investment plans will be "appropriately calibrated to the operating environment" — going so far as to state that while they are fully committed to investing in growth – especially in their artificial intelligence infrastructure, business platform and Reality Labs – they're now planning to "slow the pace of some of our investments." This commentary materialized in a reduction to expense guidance. Furthermore, Zuckerberg said he's confident that Meta Platforms]can return the Family of Apps segment to "better revenue growth rates over time and sustain high operating margins". As for Reality Labs, Zuckerberg reiterated it will require large investments for the goal of the metaverse to be realized because it's "something that's never been built before and it's a new paradigm for computing and social connection." To fund these investments, he said he's set a goal to "generate sufficient operating income growth from Family of Apps to fund the growth of investment in Reality Labs, while still growing our overall profitability." Ultimately, following last quarter's DAUs decline at Meta and this quarter's subscriber decline at Netflix, which tanked that stock, investors were on edge coming into this report from Zuckerberg and company. While not picture perfect, it was exactly what Meta Platforms needed to improve investor sentiment and make clear that they have a plan in place to address the current headwinds, maintain strong profitability and keep growing revenue over the long-term. However, in the near-term, the upcoming quarter was guided for relatively flat growth at the midpoint. Companywide Q1 results On the top line, revenue of $27.91 billion — up 7% year over year — missed expectations of $28.29 billion. However, on the bottom line, diluted earnings of $2.72 per share — while down 18% year over year — exceeded the $2.51 the Street was expecting. Additionally, operating income of $8.52 billion — while down 25% year over year — outpaced expectations of $8.45 billion. Within the Family of Apps unit — which includes Facebook, Instagram, Messenger, WhatsApp and other services — advertising revenue of $26.998 billion came up short versus expectations of $27.47 billion while other services revenue came in at $215 million. As for Reality Labs — which includes augmented and virtual reality related consumer hardware, software and content — revenue came in at $695 million, ahead of expectations of $667 million. As for profitability, Family of Apps operating income came in at $11.48 billion, missing expectations of $12.39 billion while Reality Labs reported an operating loss of $2.96 billion, smaller than the $3.43 billion loss the Street was anticipating. Finally, Meta repurchased $9.39 billion worth of shares in the quarter and ended the quarter with $43.9 billion in cash, cash equivalents and marketable securities on the balance sheet. First-quarter engagement Taking a look at Facebook specific engagement metrics: Facebook Daily Active Users (DAUs): 1.96 billion vs. 1.949 billion expected Facebook Monthly Active Users (MAUs): 2.94 billion vs. 2.96 billion expected Facebook DAUs/MAUs: 67%, an uptick up from the 66% level we have seen since 2Q 2020 Facebook Global Average Revenue per User (ARPU): $9.54 vs. expectations of $9.34 per user 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): 2.87 billion, up 5.5% year over year Family Monthly Active People (MAP): 3.64 billion, up a similar 5.5% year over year Family DAP/MAP: 79%, largely in line with the rate we've seen over the past two years Family Global Average Revenue per Person (ARPP): $7.72 Notably, management commented on the release that ad impressions across the Family of Apps were up 15% year over year, though the average price per ad was down 8% year over year. Reels commentary It is no secret at this point that Reels monetizes at a lower rate than the rest of the business. Remember, we heard similar commentary from Alphabet management Tuesday night in regards to Google's YouTube Shorts versus traditional YouTube advertising. On Wednesday night's call, Meta management provided encouraging commentary that serves to reaffirm our view that just as they were able to improve Stories monetization over time, they will pull it off once again with Reels. As you may recall, Stories was also a monetization headwind when it first came to the platform, taking up engagement time and monetizing at a lower rate than Feed. First, COO Sheryl Sandberg called out "great consumer engagement on Reels," which is step one and arguably the most important in terms of providing solid returns to advertisers. Second, Sandberg noted they are doing all they can to help advertisers create better ads for the short-from video format. Third, Sandberg said that "at the end of the day, advertisers are chasing ROI, they're going to go where they get a return on their investment. And while [Reels] still monetizes at a lower rate versus Feed and Stories, advertisers who are using it are seeing really promising results." Sandberg then went on to provide some quantitative metrics, calling out that direct-to-consumer hair care brand Prose did some A/B testing by adding a Reels ad to their existing campaign and realized some very promising results. In addition to a 23% reduction in cost per purchase, they realized a 52% increase in unique audience reach and a 3x increase in video completion rates. This indicates to us that while Reels may be a headwind for now, longer-term as Meta helps advertisers better leverage the short-form video medium, it stands to provide brands with a new way to get their message across to a wider audience at a lower cost despite the shorter attention span of consumers. Guidance Moving on to guidance, Meta Platforms expects total revenue in the second quarter of 2022 to be in the range of $28 billion to $30 billion, short versus estimates of about $30.94 billion. Included in this outlook are ongoing monetization headwinds as noted above, as well as the impact from Russia's war in Ukraine. On the call, Zuckerberg said the company has been blocked in Russia and decided to stop accepting ads from Russian advertisers globally — direct drags compounded by the broader impact that the war is having on businesses globally. Additionally, serving to offset the lighter than expected revenue guide, management reduced full-year expense expectations to $87 billion to $92 billion from the $90 billion to $95 billion range. Capital expenditures guidance was left unchanged at $29 billion to $34 billion, above the $30.83 billion consensus at the midpoint. (Jim Cramer's Charitable Trust is long FB, APPL and GOOGL. See here for a full list of the stocks.) 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Mark Zuckerberg, chief executive officer of Facebook Inc., speaks during the virtual Facebook Connect event, where the company announced its rebranding as Meta, in New York, on Thursday, Oct. 28, 2021.

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