It’s clear that the cost of gaining each incremental load of revenue is a lot harder than it used to be for Meta (META) platforms.
This is why expenses have exploded out of control, but I wouldn’t say that it’s time to take profits because they benefit from the “too big to fail” mantra just like other systemically important stocks.
I don’t believe they will rekindle sales growth of yore because there isn’t anything on the horizon that strikes me as something that would be a game changer.
The metaverse which they are sinking a fortune into has turned into a black hole of capital.
CEO Mark Zuckerberg himself couldn’t explain on the conference call when there would be tangible results that would deliver help to the bottom line.
That means open-ended funding to R&D and that is not what you want to hear from shareholders.
The pay-as-you-go elements to this don’t bode well, because they still don’t understand how they can monetize AI.
The silver lining here is that Meta is still quite profitable.
The top line of $28.6 billion was up 3% year over year.
It was the first year-over-year revenue growth Meta has been able to muster since the first quarter of last year. Per-share earnings of $2.20 also topped the consensus of $2.02.
Sales guidance for the quarter currently underway was also better than expected, with the company forecasting a top line of somewhere between $29.5 billion and $32 billion.
Q1's net income of $5.7 billion is 24% less than the bottom line from the first quarter of 2022 showing that even though they make a lot of money, profitability is slowing.
While Meta did sequentially add 60 million daily users to its services last quarter, most of that growth came from the Asia-Pacific market or the "rest of the world" - not Europe, Canada, or the U.S.
Those two markets experience the lowest ARPU (average revenue per user) figures among all the ones Meta serves.
And in both of those cases, ARPU figures have been essentially stagnant since the second quarter of last year.
It’s increasingly worrisome that the growth part of META is low quality.
Zuckerberg knows that it’s a fight to the bottom with his existing business which is why he is hell-bent on making the metaverse work.
Don’t forget that META shares fell from $360 per share last year and many investors can describe the recent price action as a reversion to the mean.
Expect higher costs to eat into META’s bottom line, but not so damaging that it will kill the business model.
The gains are there to be had, but don’t expect any high growth to come from META – those days are essentially over.
META will most likely grind higher and I do believe investors should buy the dip when available.
When the trend isn’t broken, then don’t fight against it.
Don’t forget they will benefit from another tailwind of end of 2023 rate cuts.
Tech business models aren’t as good as they used to be, but that doesn’t mean these stocks won’t go up.
A tepid META receiving investor love also shows how bad things are at the bottom of the barrel from SPACS to lockdown darlings.
Small growth stocks have little to no chance to compete moving forward so investors should only focus on “too big to fail” tech stocks in a world of higher rates.
