Meta earnings were ‘bad, but not the worst,’ analyst says

Wedbush Securities Managing Director of Equity Research Ygal Arounian joins Yahoo Finance Live to discuss the earnings report from Facebook parent company Meta, the outlook for revenue growth, and the metaverse.

Video Transcript

JULIE HYMAN: Facebook parent company Meta out with earnings, of course, after the bell yesterday. The shares are spiking, and the quarter was mixed, however. We've seen other big tech players get affected by waning demand for advertising and some of the other issues that we have seen. Let's talk more about that with Wedbush managing director Ygal Arounian.

Ygal, good to see you. As we see this reaction in Meta, we were talking earlier that this seems to be largely a function of Zuckerberg's comments on the call, where he basically said he isn't going to be all in on Facebook Reality Labs, or at least, not yet. Is that how you're kind of seeing the reaction here?

YGAL AROUNIAN: Yeah, I think that's part of it because the expenses and the commitment to develop that are certainly a big one. And he also talked on the call about how the revenue generation from-- material revenue generation from that could still be years away. He talked about it. The 2030s is when, you know, that really becomes a time where they could really monetize that.

That's part of it. But I think the expectations have just gotten so low. Investors were really nervous about what the core business was doing, the digital advertising market. And then also some of the biggest headwinds that we saw last quarter-- competition from TikTok, the impacts from Apple's privacy initiatives-- they didn't go away, but they didn't get worse. And you saw users which declined sequentially for the first time ever in 4Q. You saw users grow again this quarter. So it was just a little bit of kind of the sigh of relief, I think, out of the quarter. I think that's what you're seeing today.

BRIAN SOZZI: Then Ygal, do you think this move higher today is just a sucker's rally? Because to your point, you're still looking at, potentially this year, Meta seeing revenue grow slower than profits.

YGAL AROUNIAN: Yeah, I'm not sure I'd call it a sucker's rally, only because of where the stock was and where it still is today. When you look at the valuation before today, the stock was trading at seven times EBITDA-- seven times next year's EBITDA, and it was really building in the worst case scenario. So are we seeing the worst case scenario? We're certainly not seeing a great scenario. The guidance for 2Q was well below expectations. They said 3Q would only-- they expect 3Q to only slightly improve from there.

So, overall, the Street numbers are coming down. The macro environment is not helping. They still continue to have some of these specific issues around some short form video competition and Apple. So it's not like things are great, but just given where the stock was, people were expecting the worst, and we got bad, but not the worst.

JULIE HYMAN: So now we've heard from Meta, we've heard from Twitter, we heard from Snap. And I'm curious, ad spending wise, how bad do you think the environment is and how long it's going to stay that way?

YGAL AROUNIAN: It's hard to know how long it'll stay, and that's what all the management teams have kind of talked about, too. The environment's not great. We're coming off of two years of-- or nearly two years of real phenomenal growth in digital advertising, really boosted from many different angles and just strength that we have never seen in the market. Now that's settling down where a lot of the slower growth we're seeing now is just lapping that significant growth and things returning back to normal.

The war in Ukraine is having a big impact, and that's one area where there's not a lot of visibility, right? Everyone-- all the management teams just kind of talked about it as, well, we don't know how long that's going to last. And inflation's having a factor, particularly in certain verticals, like a CPG. That's something that could last for a while. So there's a lot of uncertainty. The environment's not great. And how long it takes to play out, I don't think anyone really fully knows right now.

BRIAN SOZZI: Then what's the trade here, Ygal? Do you-- because I see two opposing stories. Do you invest in a higher multiple name like Snap that is showing higher growth rates, or do you go to something like a Meta that sounds like more-- like a value play at this juncture?

YGAL AROUNIAN: I think you could do both with Meta. I think a lot of the downside's probably captured. Certainly, things can get worse on the macro side. That would impact everyone. But a lot of the negative-- the headwinds and the challenges for Facebook have become better understood over the past couple of quarters. And I think that's built into the stock. Where we actually think is the best place to put money to work is in Alphabet, which has some better exposure.

Its cloud business, which is growing very nicely, still seeing a lot of strength. That's an area that's not as exposed to some of these macro headwinds. Its search business remains very strong. Saw some weakness in YouTube, which is more along the lines of what we've seen across the board. But we like Alphabet, actually, the best here from the group. The valuation for Meta has gotten more attractive. If you want to move up the risk curve, you know, Pinterest and Snap are there as well.

JULIE HYMAN: Do you feel like what we've heard from Alphabet and now Meta maybe represents a bit of a bottom for these stocks? Do you think that we're at a turning point for better?

YGAL AROUNIAN: It feels like that today, to a certain extent. You know, again, things have gotten really depressed. Valuations have gotten near all-time lows. Some of them are. We're seeing troughs. For where we are today, I think that that can be the case.

But there's still a lot of uncertainty, right? The rising rate environment, we just saw GDP came out today. It was a negative number. Rates are probably going to keep going up for some time. So I don't think we're out of the woods in terms of what the next six months, a year plus, kind of brings to the table. And advertising is very exposed to recessions. So, I don't think you could rule out that things get worse. But there's also a lot that's baked in right now.

BRIAN SOZZI: All right, we'll leave it there. Wedbush managing director Ygal Arounian, always good to see you. We'll talk to you soon.