Meta Platforms (Nasdaq: META) shares were down more than 24% following the company's poorly received Q3 earnings report which showed a miss on the bottom line and a small beat on the top line. More concerning was that the company's costs continue to increase as the company heavily invests in its VR division, Reality Labs, with little sign of success or traction.
The report also marked Facebook's second straight quarter of declines and increases concern that its legacy businesses are quickly eroding due to Apple's (Nasdaq: AAPL) privacy changes, Tiktok winning the battle for the eyeballs of teens and young adults, and changes to Instagram to compete with Tiktok that is also negatively affecting ad revenue.
Overall, Meta shares are down 71% YTD and nearly 77% from their all-time high in September of last year. Shares are quite cheap on a historical basis with a P/E of 8.2 and profit margins remain lofty at 28%. Still, the stock fits all the criteria of a 'value trap' if its core businesses continue to lose market share and momentum.
Inside the Numbers
In Q3, Meta reported $1.64 per share in earnings which were below expectations of $1.89 per share. Revenue beat at $27.7 billion vs $27.4 billion. This was a 4% decline on the top line, while earnings were down 52% due to higher cost pressures. Overall, operating margins came in at 30% vs 46% the previous year.
Daily active users came in at 1.98 billion which was in line with expectations. Most concerning was the decline in average revenue per user which was $9.41 vs expectations of $9.83.
Reality Labs' revenue declined by nearly half to $285 million and the unit's loss widened to $3.7 billion from $2.7 billion the previous year. In total, the unit has lost $9.7 billion and is expected to continue bleeding for the next couple of years.
Next quarter, it sees revenue between $30 billion and $32.5 billion which was less than analysts' forecast of $32.2 billion. Meta's near-term challenge is the loss of market share given Tiktok's rise and a deteriorating macro environment which is leading advertisers to be more conservative in spending on the platform. Notably, competitors like Snap (Nasdaq: SNAP) and Google (Nasdaq: GOOGL) whose revenues are also ad-dependent saw declines of more than 20% following their earnings results.