seekingalpha.

com
/article/4524744-meta-platforms-q2-important-quarter

Meta Platforms Q2: An Important Quarter

The Asian Investor ⋮ ⋮ 21/7/2022

Summary
Meta Platforms is going to submit its highly anticipated earnings card for Q2’22 next week.
DAU and cost trends are among the most important areas investors need to watch.
Based off of free cash flow and earnings, Meta Platforms’ shares represent very strong value.

Meta Platforms (NASDAQ:META) is going to reveal its second-quarter earnings sheet on July 27 and while the
company is not expected to do exceptionally well due to headwinds in the digital advertising business, Meta Platforms
could beat low EPS predictions nonetheless. Despite cost pressures and daily active user challenges, Meta Platforms'
earnings card could show up to $9B in free cash flow for Q2'22 and improved costs. Shares are very competitively
valued and the bar to beat EPS predictions is low!

Expectations for Meta's Q2: Low EPS bar, trend in daily active users and
free cash flow
Meta Platforms is expected to report normalized EPS of $2.58 for its second-quarter next week, implying a year over
year decline of 29% due to advertising challenges and growing competition from TikTok, mainly. I believe EPS
predictions are so low that Meta Platforms has a reasonable chance to outperform next week.

Seeking Alpha

Social media platforms rise and fall with user trends and possibly the best example for this is Meta Platforms. The
social media company saw a continual increase in its daily active user/DAU growth as a public company until Q4'21
which is when Meta Platforms revealed that its DAUs fell 1M quarter over quarter to 1.929B. It was the first decline
ever in daily active users for the company, resulting in the market wiping off more than $200B in Meta's market value.
To this day, Meta Platforms' shares have not recovered from the sell-off and the company's stock chart reveals a giant
gap reaching all the way up to $323.

However, in Q1'22, Meta Platforms' DAUs increased 31M to 1.960B and I believe the platform could report the addition
of 2-3M new daily active users for Q2'22. Despite the dip in DAUs in Q4'21, the long term trend in Meta's user
acquisition looks healthy.

1/4
 Statista

Turning to free cash flow and margins.

The second-quarter will likely have seen continual headwinds in Meta's digital advertising business due last year's iOS
update from Apple which limits the ability of advertisers to track consumers' online behavior. Meta Platforms is also
seeing a challenge from Chinese-owned TikTok app which has become incredibly popular with younger users and
which is drawing users away from Facebook.

Despite those challenges, one should not forget that Meta Platforms is an enormously profitable enterprise. The firm
has guided for Q2'22 revenues of $28-30B which implies a potential increase of up to $2B over Q1'22 revenues. Since
Meta Platforms consistently achieved free cash flow margins of around 30% or higher, I expect the company to report
Q2'22 FCF in the range of $8.4-9.0B.

in mil $ FQ1-22 FQ4-21 FQ3-21 FQ2-21 FQ1-21

Revenues $27,908 $33,671 $29,010 $29,077 $26,171
Operating Cash Flow $14,076 $18,104 $14,091 $13,246 $12,242
Purchases of Property/Equipment ($5,315) ($5,370) ($4,313) ($4,612) ($4,272)
Payments on Finance Leases ($233) ($172) ($231) ($123) ($151)
Free Cash Flow $8,528 $12,562 $9,547 $8,511 $7,819
Free Cash Flow Margin 30.6% 37.3% 32.9% 29.3% 29.9%
(Source: Author)

Despite challenges from increasing competition and changes to advertiser policies, the social media company is set to
have a great year regarding free cash flow. I estimate that Meta Platforms could earn $38-40B in free cash flow in FY
2022 -- a decrease of $2B compared to my prior estimate because I believe advertisers have shifted more ad dollars
to other platforms in the second-quarter, especially TikTok. Based off of revised FCF expectations, shares of Meta
have a P-FCF ratio of 12.4-13.1 X.

Meta could outperform on costs

Meta Platforms announced a cost-cutting push in May as the company seeks to adjust its operating costs due to
slowing revenue growth going forward. The social media company has guided for total expenses of $87-92B for Q2'22.
Changes in the digital advertising landscape have added to persistent cost pressures in Meta Platforms' business, so if

2/4
the company executed well against its cost cutting targets in Q2'22, which I expect, the company may lower its total
expense forecast for FY 2022 a second time next week.

The cheapest FAANG stock

Based off of earnings, Meta Platforms is the cheapest FAANG stock that investors can buy right now. The cheap P-E
ratio of 13.7 X is the result of Meta's large drop in February when it revealed its first-ever drop in daily active users.
Based off of earnings and considering the large size of the company's free cash flow, Meta Platforms' is the safest
FAANG stock, besides Google (GOOG), that investors can buy right now.

Data by YCharts

Risks with Meta Platforms

The biggest risk for Meta Platform is user churn. If TikTok succeeded in leading more users away from Facebook, the
social media company may face a decline in daily active users and a more serious decline in platform ad spend which
I believe are the two most important key metrics for Meta Platforms, even more important than free cash flow margins.
A decline in DAUs next week would be a strong warning for the social media company that it has to do more to stay
relevant with younger people and it could drive shares of Meta significantly lower. While the social media platform has
rolled out competing products like Reels to compete with TikTok, the advertising wars between platforms can be
expected to continue to heat up.

Final thoughts
Meta Platforms' shares represent deep value before earnings, whether the social media company will exceed
expectations next week or not. I believe we are going to see a 2-3M uptick in daily active users as well as robust free
cash flow of up to $9B. Shares of Meta Platforms have an extremely attractive risk profile, based off of free cash and
earnings, and if Meta surprises next week with better cost performance and DAUs, shares could continue their
recovery trend and revalue higher!

This article was written by

3/4
The Asian Investor

14.61K Followers

I look for high-risk, high-reward situations. Five largest portfolio holdings: AMD, Micron, Alibaba, Ethereum, PayPal.
Early buyer of cryptocurrencies. I live in Thailand and Canada.

Show more

Disclosure: I/we have a beneficial long position in the shares of META, GOOG either through stock ownership,
options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is
mentioned in this article.

Comments (19)

1/ Both Zuckerberg and Sandberg will be back on the stand to follow-up on the Cambridge Analytica scandal this Sept.
6 hours for Zuck, 5 hours for Sandberg. arstechnica.com/...2/ Meta’s Facebook growth sees woes in India — its
biggest market - nypost.com/...3/ Internet ad names ($Meta) dip in wake of Snap's bad report -4.66% -
seekingalpha.com/...
~BigZ~

@The Asian Investor Facebook has only managed to polarize people and destabilize governments on every continent.
It does have inimitable capital in terms of data and its relatively high advertising revenue market share, however, it is
maturing with a minimally diversified revenue stream. It's overall degree of inimitable capital is weak in my opinion.
TikTok, MSFT, GOOGL, & AMZN are all growing in the advertising space at METAs despair. GOOGL is superior
relative to META. GOOGL is highly diversified and has a much higher degree of inimitable capital (IP, specialized
resources and relationships, a higher data capture opportunity, trade secrets, innovation streams, staircases to growth
etc). Given - METAs fundamentals, low debt, profitability, and valuation are not bottlenecks and are better than
GOOGL presently. I believe this is skewed as GOOGL is constantly reinvesting more in non-core opportunities often at
a loss which is a strategic opportunity cost for increased future operating leverage and market share. Competition, lack
of innovation, polarization, and lower degree of inimitable capital and revenue streams are severe bottlenecks for
META. In terms of metrics that GOOGL beats META are relative to key forward metrics - FWD Rev G; FWD EBITDA
G; 5YR EPS G; & FWD FCF G (GOOGL = 22.69%; 26.22%; 18.93%; 26.98%) vs (META = 18.31%; 12.28%; 12.26%;
10.24%). While META is still a solid fundamental company, its historical operating performance, in my opinion, is
greater than it's future potential. It's market is highly saturated in terms of user growth and competition and lower
degree of inimitable capital are key reasons I can't recommend investing in this company. Game Theory is in play.
Competition and/or lack of innovation will undermine ROIC and reduce METAs EVA/MVA going forward longer term.
CapitalAccretion

Univestable - good luck.

Joshua Lutkemuller, CFA

4/4