Revenue Miss? No Problem for Meta. This Metric Is More Important.
Revenue Miss? No Problem for Meta. This Metric Is More Important.
There isn’t just one way to evaluate a tech company, but from the recent headlines from earnings reports, you would think there is:
“Twitter Hits 217 Million Daily Users, Stock Jumps” — Hollywood Reporter
“Spotify Stock Drops 20% on Weak Subscriber Numbers amid Joe Rogan Controversy” — New York Post
“Roku Shares Gain After Q1 Revenue Beat, 1.1M Incremental Active Accounts” — Benzinga
“Netflix Rocked by Subscriber Loss, May Offer Cheaper Ad-Supported Plans” — Reuters
“Facebook Parent Meta Soars 16% after Q1 Results Show User Growth Recovery, and Mark Zuckerberg Reins in Metaverse Spending” — Yahoo
It’s seemingly all about user growth for tech companies now, and it’s that last headline that we’re going to focus on today.
Because only one quarter prior, it was a different story for Meta Platforms Inc. (FB), so let me set the stage to show the growing importance for tech companies to talk about their growing user base.
In Q4 2021, Meta reported that the number of Facebook’s daily active users (DAU) —t he number of people who open and engage with a mobile app or web product during a 24-hour period — declined for the first time ever, dropping by as much as half a million over the previous quarter. Meta also missed on earnings estimates, coming in at $3.67 per share compared to the expected $3.84.
Even beating on revenue by $270 million, Meta stock plunged 26% on Feb. 3, wiping out $230 billion in company value (and $30 billion of Mark Zuckerberg’s personal wealth).
It was the largest single-day drop in the company’s history.
There were plenty of excuses for this failure. They included competition from other short-form video platforms, like TikTok; the difficulty in monetizing these videos over more traditional mediums; and tighter restrictions from Apple iOS’ privacy terms.
Now, let’s take a look at the results from the most recent quarter…
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In Q1 2022 the tide turned for Zuckerberg and Meta Platforms. And as you read in the headline earlier, at least part of the reason was user growth recovery.
After announcing the company beat earnings estimates, with EPS landing at $2.72 versus the expected $2.56, FB stock spiked, jumping 18% by the end of trading on Thursday, April 28.
However, Meta failed to match revenue expectations, coming in at $27.91 billion, missing the estimated $28.2 billion by 1.03%, or $290 million.
But investors seemed to ignore the revenue miss and were emboldened by the rise in daily active users.
Though Meta lost engagement in the previous quarter, in Q1 2022 it added 40 million daily active users, raising the engagement level to 1.96 billion users.
In Meta's case, that’s millions more people potentially liking, commenting on, and creating posts.
And the more time that people spend on the platform, the more valuable Meta looks to advertisers paying to get their ads in front of a large audience.
From the importance being placed on user growth, you can’t discount its effect on the stock price.
I wouldn’t rely on DAU as your primary indicator of where a stock may be heading, but it certainly represents one more tool in your arsenal.
And one that is fairly easy to interpret: More DAU is good; less is bad.
Of course, as I mentioned, there are more ways to analyze short-term and long-term profit opportunities with Meta than solely relying on user growth trends.
Since the beginning of the year, FB has lost 39% of its value, starting out on Jan. 3 at $338.54 per share and finishing up April 28, one day after the earnings announcement, at $205.73.
To put this into perspective (as mentioned above), FB actually gained 18% after the announcement. So investors must have confidence that it’s on the right trajectory.
According to TradeSmith’s algorithms, FB has a solid medium-risk Volatility Quotient (VQ) of 29.53%. It entered the Red Zone on Feb. 3, right after the dismal Q4 2021 numbers were released.
FB has been in a downward trend for the past two months, but after its 18% jump on positive earnings, and given its increased DAU numbers, that could change soon.
Even with the headwinds from competition for users, and issues with Apple’s privacy stipulations, FB is still recommended by 10 financial newsletters we track. And it appears among the holdings of seven billionaire investors in our Billionaires Club.
Our Timing by TradeSmith indicators suggest that the stock is currently in a valley until mid-May with medium-level conviction, which is a bullish signal.
And our friends at LikeFolio have also rated FB as Bullish, meaning they believe it may be undervalued and may gain in price over the next six to 12 months.
Further, I’d like to suggest that if the trend toward growth continues, the current 39% discounted price might represent a buying opportunity once this stock triggers either an Early Entry Signal or lands back in the Green Zone.
Regardless, it’s a company we are watching, and it may be one you want to add to your watchlist too.
Enjoy your Tuesday,
Keith Kaplan CEO, TradeSmith
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