Meta Q2 Earnings Preview

A host of negative events over the last quarter have conspired to lower expectations for Meta's profits, but could it be the market is underestimating the premier social media platform?

----------------

Pushing against all odds

The two main issues expected to affect Meta's profitability are: Apple's toughened stance on privacy which interferes with the ability to deliver targeted ads; and secondly, the generalized drop in ad spending starting in May as economic growth in Meta's key market, the US, was seen slowing down. 

Some point to Snap's disappointing results as foreshadowing, and Meta shares dropped in response to its rival's results. But Meta has a broader advertiser base and relies more on smaller, localized businesses for revenue. That could help insulate the firm a bit from the drop in larger corporate marketing spending.

Strong dollar vs Metaverse

The other concern is that if Meta's revenue is under pressure, that will induce a further cut to capital expenditures. Already Meta forecast a currency headwind and reduced its spending in anticipation. As the dollar has strengthened in the meantime, it means that guidance might have to be revised to accommodate an expected larger currency headwind.

While this might give the stock a boost in the short term and reassure investors that the cash flow is there, Meta is in the process of moving to the Metaverse and the delay in capex could push the expected returns on the company's transformation further into the future. Executives might spend more time talking about this transformation, and disappoint investors who are more worried about the shorter-term issue of how Meta will handle a stronger dollar and less ad revenue.

Meta is forecast to report earnings of $2.54 on $28.9B in sales.

$FB Falling Wedge

The share price of Meta is in a bear market but some mean reversion is possible ahead of the 2020 low.

Last week the charts showed a bearish inverted hammer, and prices are on a descent. Although pressure has been increasing over time, momentum has been waning. This has resulted in a double bullish divergence. 

Down below the swing low of $155, $137 is the next major support. Losing this could lead to a slump back to $100. Inversely, the 20-week average of $190 is major resistance, and $250/60 medium-term target. 

So long as the RSI stays above oversold territories while prices fall within the apex, a reversal could be due.

Key takeaways 

Meta's expected profitability is likely to be limited by Apple’s toughened stance on privacy and the broader economic slowdown. But Meta's stock might be able to sustain itself because it relies on smaller brands.

Along with the risks from delaying its capex in anticipation of moving to the Metaverse, investors will also want to see how the company plans to deal with short-term currency risk. The reduction in spending might boost the share price, however, it doesn’t increase profitability.