META headwinds played out?

In Q3 call Zuckerberg said

“While we continue to navigate some challenging dynamics of volatile macroeconomy, increasing competition, ads signal loss and growing costs from our long-term investments. I have to say that our product trends look better from what I see than some of the commentary, I've seen suggests.”

He highlights 4 headwinds

1)Volatile macroeconomy -> lower CPM

2)Increasing competition -> TikTok

3)Ads signal loss -> Apple ATT

4)Long-term investments -> R&D & Metaverse

Let’s go one by one.

1) Volatile macroeconomy -> lower CPM

This is not a Meta specific issue but impacts all ads business. Alternative data on META CPM suggests Oct started weak but ended strong. CPM seems flattish for the full month of Oct YOY based on this data set. Compare this to July when CPM was clearly negative YOY.

Q4 seems to have started better than Q3 from a CPM YOY perspective. Incremental sequential drag looks unlikely from this headwind.

Source: https://datastudio.google.com/embed/reporting/9b7783e4-7b55-4840-93bc-3c9469f519c6/page/p_rjufsbv1yc

2) Increasing competition -> TikTok

Zuckerberg said “Reels is incremental to time spent on our apps. The trends look good here and we believe that we're gaining time spent share on competitors like TikTok.”

Are they really gaining time share from TikTok? Answer is highly likely.

Alternative data from Data.ai suggests US total time spent on TikTok has been flat in Q2 & Q3. Total time spent on Instagram is also flat in Q2 & Q3. TikTok is not gaining any more time spent vs Instagram. Reels is working. Incremental sequential drag looks unlikely from this headwind.

3) Ads signal loss -> Apple ATT

In the call, CFO said “Consistent with our expectations the headwind to year-over-year growth from Apple's ATT changes diminished in Q3, as we lap the first full-quarter post the launch of iOS 14.5.”

Apple ATT which led to signal loss for META was rolled out in Q2 2021. Q3 2021 was the first full quarter with Apple ATT. Q3 2022 was the first quarter to lap full ATT rollout and thus headwind diminished sequentially.

For Q4 2022 there will be no incremental drag due to this headwind. In fact, there could be some benefits kick in here from META’s AI efforts.

4) Long-term investments -> R&D & Metaverse

Meta already gave initial guidance for 2023 expense and capex. While this was not what investors wanted, this headwind is likely priced in post the selloff.

Incremental sequential drag looks unlikely from this headwind.

To summarise the headwinds

1)Volatile macroeconomy -> lower CPM -> low incremental sequential risk as per alt data

2)Increasing competition -> TikTok -> low incremental sequential risk as per alt data

3)Ads signal loss -> Apple ATT -> no incremental sequential risk

4)Long-term investments -> R&D & Metaverse -> priced in

Risk reward favours being long META right now.