Insights

1 Big Red Flag From Meta’s Earnings Report

Shares of Meta Platforms (NASDAQ: META) slipped on Thursday, following the Facebook parent’s second-quarter earnings report. Investors were spooked as the company’s revenue trend went negative, missing analysts’ average forecast for the quarter. Even more, management’s guidance for the third quarter was also below expectations. 

With a performance like this, it’s not surprising to see weakness in the stock on Thursday. But it may be more than these numbers that are prompting a cautious view toward the stock. There was one specific comment in the company’s earnings call that provided a particularly gloomy picture of Meta’s business trends.

Advertiser demand is softening

Explaining the company’s 1% year-over-year decline in revenue and management’s outlook for an even worse revenue decline in Q3, Meta Chief Financial Officer Dave Wehner said that the current economic environment is weighing on the tech company‘s performance.

“Advertising revenue growth slowed throughout the second quarter as advertiser demand softened,” Wehner said. He noted that the weakened demand has been evident across all of its advertising verticals, all but confirming that businesses are cutting their budgets for ad spending. Wehner believes businesses are taking these actions “in response to the increased economic uncertainty.”

The verdict isn’t in yet

While recent earnings reports from digital advertising companies do confirm there likely is some softening in advertiser demand, it may not be as bad as Meta’s second-quarter performance and third-quarter guidance would suggest. Google parent Alphabet, for instance, saw its total second-quarter revenue grow 13% year over year — or 16% on a constant currency basis. Spotify Technology‘s advertising revenue increased 31% year over year in the same period. Meta’s second-quarter performance is disappointing when compared to these companies’ results.

As earnings season continues to unfold, investors will get more data points from other digital advertising companies to get a better idea of how much of Meta’s problem is company-specific and how much is due to macro trends.

Of course, investors should still take note of Meta’s observation of softening advertising demand. The fact that it is being seen across all verticals is particularly telling.

What about Meta stock?

But investors shouldn’t turn their backs on Meta stock. With a price-to-earnings ratio of just over 11 at the time of this writing, a tough road may now be fully priced into the stock. Shares, therefore, are at least worth a spot on investors’ watch lists.

Still, investors should tread carefully. It may be wise to wait to invest in the tech stock until there’s solid evidence that the company is performing at least on par with more digital advertising peers on a year-over-year basis. This is especially true now that management is doubling down on its efforts to slow the pace of its investments in growth opportunities, including its pace of hiring.

Meta CEO Mark Zuckerberg told investors during the company’s earnings call that he is expecting its workforce to “get more done with fewer resources.” Investors may want to sit on the sidelines for a bit while they wait to see if this leaner approach to growth will work for Meta.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., and Spotify Technology. The Motley Fool has a disclosure policy.

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