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Earnings Outlook: Can Facebook earnings show it deserves the name Meta?

Facebook wants to be called “Meta,” but its earnings will show the business is almost entirely Facebook.

In its first report since rebranding as Meta Platforms Inc. FB, +1.41%, the social-networking giant for the first time will display its revenue for the virtual-reality business that Chief Executive Mark Zuckerberg hopes to turn into a massive “metaverse” business. The new reporting structure could tell us how many Oculus headsets Facebook sold during the holidays, and how much VR revenue it raked in from delivering content to those devices — and will show how small that business is compared with the massive social-networking advertising revenue.

When Meta reports fourth-quarter results Wednesday after the bell, the current core business will be reported as Family of Apps, or FoA, which includes Facebook, Instagram, Messenger, WhatsApp and other services, and the usual advertising revenue. The company also plans to report other revenue, which consists of net fees it receives from developers using payments infrastructure and revenue from other sources, within the Family of Apps segment. Within that segment is Reality Labs, which entails augmented- and virtual reality-related consumer hardware, software and content.

Opinion: Dear Facebook: No one cares about Oculus, give us Instagram revenue!

Reality Labs should be a very small part of Meta’s overall business. In the third quarter, Facebook reported revenue of $29 billion, with $28.28 billion of that credited to advertising and the rest — less than $750 million — assigned to payments and other fees. Some, for now unknown, portion of the smaller numbers is Facebook’s current “metaverse” business.

“The metaverse opportunity is a ways off,” Piper Sandler analyst Thomas Champion understated in a recent note.

The opportunity for growing that business is why Zuckerberg is focusing on it, however, as the advertising business could face difficulties ahead. The company is slogging through a bear market reflective of fears over a declining online advertising amid supply-chain shortages and COVID uncertainty, say analysts, who also caution about changes to Apple Inc.’s AAPL, +0.41% rules for advertising on mobile apps, analysts caution.

“There could be a more pronounced slowdown in Q1… with headwinds coming from supply chain shortages, Omicron uncertainty, and ongoing privacy headwinds,” Jefferies analyst Brent Thill said in a Jan. 30 note.

Still, the ad business should be strong enough to carry Meta, which controls a big chunk of the global market with Alphabet Inc.’s GOOGL, +8.25% GOOG, +8.05% Google. Underscoring the general sentiment of financial analysts, Evercore ISI analyst Mark Mahaney expects strong online ad demand but “significant” headwinds for direct response advertisers from Apple’s changes.

For more: Facebook’s acquisitions of Instagram and WhatsApp are antitrust targets, but its metaverse mergers may be the victims

At the same time, lingering in the background, is the Federal Trade Commission’s dogged pursuit of divesting Instagram and WhatsApp from Meta. Legal experts doubt that effort will succeed, but the agency is likely to stand in the way of fresh acquisitions as much as it can while Meta seeks to buy its way to a fully functioning “metaverse.”

What to expect

Earnings: Analysts on average expect Meta to report earnings of $3.85 a share, down from $3.88 a share a year ago. Analysts were projecting $4.08 a share at the end of September, but have brought down their estimates.

Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are also projecting earnings of $3.85 a share on average.

Revenue: Analysts on average expect Meta to report $33.4 billion in fourth-quarter revenue, up from $28.07 billion a year ago. Meta guided for revenue of $31.5 billion to $34 billion, and Estimize contributors predict $33.4 billion on average.

Stock movement: Facebook shares have declined after earnings reports in four of the past five quarters, including falling 3.9% and 4% after the past two reports. Before that run, Facebook gained after earnings six of the previous eight quarters.

Meta’s stock is up 18% over the past 12 months, while the S&P 500 index SPX, +0.90% has increased 15.5%. Shares of Meta are down 5% since the company announced third-quarter results on Oct. 25.

What analysts are saying

Meta faces a variety of obstacles this year, starting with genuine concerns over the online ad market, and the growing impact of TikTok, analysts warn.

“Advertisers believe Tiktok’s competitive crossover is actually more towards [Meta] vs. Snap SNAP, -4.43%, ” RBC Capital Markets analyst Brad Erickson said in a Jan. 26 note that lowered his price target on Meta to $415 from $400 with an outperform rating.

“For every challenge, we see strong rebuttals, and take the view that FB offers the best setup for any digital ad name for ’22 and our second favorite pick behind [Amazon.com Inc.] AMZN, -0.73%, ” AB Bernstein analyst Mark Shmulik said in a Jan. 28 note that rates Meta shares as outperform with a price target of $400.

Still, Shmulik acknowledged he understands “investor hesitation building large positions in the name given unresolved IDFA issues, engagement and ad share pressure from TikTok, a challenged digital ad setup, regulatory overhang, risk of flat Y/Y EPS, and the unknown of how/if to underwrite the metaverse.”

Overall, 42 of the 54 analysts tracking Facebook consider the stock the equivalent of a “buy,” according to FactSet, while only one rates the stock a “sell” and the 11 others call it a “hold.” The average price target as of Tuesday was $397.54, more than 25% higher than the going rate for shares.

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