2/3/2022 – FB Q42021 Earnings Call Note – UT Fund
My conclusion is that we should stay away from Facebook (or Meta) for 1-2 quarters before buying the dip.
This is for several reasons:
1) 1H2022 will be compared against comps that were not affected by Apple’s Identifier for Advertisers (IDFA). Facebook (FB) expects these headwinds to remain in 1H2022 (and possibly even increase over the rest of 2022). This not only affects ad targeting, but also their e-commerce platform, which was a major initiative.
2) FB is transitioning its focus to Reels (short-form video). This is currently much less monetizable than Facebook’s news feed and other video components, and they are sacrificing this profitability (profitability of user time spent in feed/stories) for growth—this is a form of cannibalization.
“Clear product-market fit, growing quickly, long way to go to catch up to be the biggest in the space.”
– Mark Zuckerberg, describing Reels
3) There continues to be weakness in both engagement/impressions (6% down in North America Year-over-Year [YOY]) and ad pricing (due to macroeconomic factors affecting small and midsize business [SMB] customers, as well as supply chain and inflation issues).
– “On targeting, it’s very much a multiyear development journey to rebuild our ads optimization systems to drive performance while we’re using less data.”
– “On this part, we’ve made real progress on that underreporting gap since last quarter, and we believe we’ll continue to make more progress in the years ahead.”
4) The core business is currently unpredictable with FB guiding a wide range of 3%-11% YoY Q12022 sales growth, citing “high level of penetration” and competition as reasons for slowing MAU growth.
5) Reality Labs (the AR and VR wing of Facebook/Meta) is expected to pressure this year’s OpEx (Operating Exposure): “We do expect Reality Labs operating loss to increase meaningfully in 2022.”
That said, here are the reasons why we should ultimately buy the dip in 1-2 quarters:
1) Facebook is arguing that the company can be successful with Reels because they were successful with implementing Stories (a competitor to Snapchat). This is objectively true; in January 2019, 2 years after Stories’ launch, the platform had 500 Million Daily Active Users (DAUs), which is twice as many as Snapchat (SNAP). Furthermore, FB was able to monetize Stories to the extent of News Feed. Reels is currently growing quickly and Zuckerburg has said that there is still plenty of room for the further monetization/growth/algorithms of Reels (if anyone can compete with TikTok, it is FB), and they are optimistic about monetizing Reels to the extent of Stories.
2) There is more advertising efficiency to unlock for current SMB customers who are not using FB’s marketing suite to the full extent, according to Sandberg. This represents a revenue growth opportunity from existing customers.
3) FB is investing heavily into scaling and growth. The bulk of their CapEx (capital expenditures) is going into infrastructure and AI. (In fact, FB’s AR/VR/metaverse initiative does not require much more CapEx in 2022, but rather OpEx – aka a high headcount increase.)
4) FB is becoming an AI play as much as a communications play. With the investments FB has made over the least few years into AI, its capabilities are underrated when it comes to overcoming IDFA headwinds, content moderation, popularizing Reels, and the creation of metaverse experiences.
5) IDFA impact on the business in 2022 is estimated to be $10 billion – which pales in comparison to the $237 billion in market cap lost today…
– The Stoic Runner