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Revolution Investing: Meta’s projections for Facebook advertising point to trouble for the U.S. economy

Shares of Meta Platforms Inc. — Facebook’s parent company, renamed in October — got slammed on Feb. 3, losing about 1/4 of what they had been worth and taking the stock back to where it was a year ago when I was really liking the valuation and setup.

It may be a good time to buy Meta Platforms FB, -26.39% around these levels, but we might need to let it wash out a little bit first.

I’m a bit worried that FANNG investors might have learned the wrong lesson after Netflix Inc. NFLX, -5.56% reported earnings after the close on Jan. 20 and warned of slowing subscriber growth:

After closing at $508.25 on Jan. 20, Netflix’s stock plunged 41% over the next four trading sessions to close at $359.7 on Jan. 26.
The stock then climbed 27% over the next four trading sessions to close at $457.13 on Feb. 1.
Netflix then fell 13% over the next two trading sessions to close at $405.60 on Feb. 3 — down 20% from its close on Jan. 20.

I think a lot of traders and investors are hoping FB will bounce in a similar way to Netflix those people will likely not hesitate to load up.

Shares of Meta closed at $323 on Feb. 2 before the earnings announcement, fell as low as $235.74 on Feb. 3 and ended at $237.76 for a 26% loss for the day. I expect the stock will rally, but also that a few weeks from now will have troubled staying above $250.

As for the fundamentals, I have to say I don’t think things are as bad as the 26% drop on Feb. 3 seemed to imply. For the first quarter, the company provided sales guidance ranging from $27 billion to $29 billion, compared to analysts’ previous consensus estimate of $30 billion.

Meta says that Apple Inc.’s AAPL, -1.67% privacy changes, which had been expected to affect Facebook’s advertising sales, have indeed done so, and that the impact could be about $10 billion for all of this year.

Let’s do a little more math here. Meta will do about $120 billion in sales this year, and $10 billion of that would be about 8%. To put this in financial perspective, let’s consider that Meta bought back about $20 billion of its shares outstanding last quarter, and on Feb. 3 it was down about 26% on those trades. That’s about $4 billion, or almost half the entire impact of the Apple privacy changes on the company’s revenue for the entire year this year. Meta will easily lose $10 billion on the $45 billion worth of shares they purchased throughout last year.

Meanwhile, the company outlined two other reasons it is worried about top-line estimates for this year, one of which doesn’t matter and one of which is a big concern for the market. The one that doesn’t matter is this, because you can’t try to game fiat currency arbitrage impact:

“Based on current exchange rates, we expect foreign currency to be a headwind to year-over-year.” 

The one that does matter is this:

“We will lap a period of strong demand in the prior year and we’re hearing from advertisers that macroeconomic challenges like cost inflation and supply chain disruptions are impacting advertiser budgets.”

If FB is seeing macroeconomic challenges of inflation and supply chain disruptions hurting its gigantic $120 billion-a-year advertising business that stretches across the entire economy from small to big and from digital to oil, then its likely that the entire economy could be teetering on a pullback.

And if our economy has been driven, at least in large part, by the free-flowing money that came during the now-ended 13-year long Bubble-Blowing Bull Market that allowed thousands of crappy, fraudulent and/or silly companies (and cryptos and other assets) to roll around in free money, then this year we could see some fundamental economic pain that we haven’t seen in many years.

The good news is that downturns are necessary for washing out the excesses and bad businesses. The really good news is that these washouts give smart, patient investors opportunities to buy good companies when they’re being punished by the broader markets and economic forces.

The bad news is that it can be painful to wait as these market dynamics play out. So be patient — don’t be greedy. If you have, like me, been patient already and defensive, then you’ve probably got some cash to put to work here and/or some shorts to cover. I don’t want to draw a line in the sand— this downturn might become more vicious before it is over or the market could stagnate and punish the bulls and bears for a few months at least.

Stepping back from all these weeds that we’re in, let’s remember this about Facebook:

We want to invest in the metaverse and this is the company that’s making the leading platform (Oculus, through its Reality Labs unit) that the metaverse will likely be built upon. And we’ve got what eventually may be a side business that already kicks out tens of billions of dollars of profit every quarter too. FB might be stuck around here and/or in a fade move for a while. But I plan to keep my long-held FB in my personal account in the place as it has been since we first bought it back at $20 or so after FB’s post-IPO crash. I plan to build up my FB position a bit more in the hedge fund over the next few weeks, but I’ll be patient about doing so for now.

The markets, after years of blowing bubbles, are not doing so any more, and I am certainly not surprised at how dramatic some of these moves downward have been so far this year. Many excesses will be cleaned up.

But the opportunities are arising for great stock picking where good analysis is what drives performance instead of just being a function of the broader markets’ direction.

Here are some reminders of old times for more perspective before I go, starting with my Facebook analysis from nine years ago when we started buying the stock before it went up 10-fold:

How Facebook gets to $100 per share (Trading With Cody) 
Cody Willard: Why I’m the Only Idiot Buying Facebook (Wall Street Journal)
Bring on the Facebook hate (MarketWatch)
Un-Trade Alert: Facebook (Trading With Cody)

Cody Willard is a columnist for MarketWatch and editor of the Revolution Investing newsletter. Willard or his investment firm may own, or plan to own, securities mentioned in this column.

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