Portfolio holding Meta Platforms (META), formerly named Facebook, reported a top- and bottom-line miss with its second-quarter results after the closing bell Wednesday.

• Revenue dropped 1% to $28.82 billion, the first year-over-year decline in company history and also lower than expectations of $28.94 billion.

• Diluted earnings of $2.46 per share —down 32% year over year — missed the $2.59 that Wall Street was expecting.

Bottom line

The results left something to be desired. However, operating income of $8.36 billion — while down 32% year over year — outpaced expectations of $8.25 billion. Daily engagement was also a bright spot. While revenue guidance came in below expectations, Meta announced it’s reducing planned spending in an effort to protect profits.

Management did call out better-than-expected engagement trends, with strong growth at Reels across Facebook and Instagram. Reels is Meta’s answer to short-form video that’s dominated by TikTok. But there is no escaping the reality that the global economy is slowing. On the conference call, CEO Mark Zuckerberg said, “We seem to have entered an economic downturn that will have a broad impact on the digital advertising business. And it’s always hard to predict how deep or how long these cycles will be, but I’d say that the situation seems worse than it did a quarter ago.”

The acknowledgement of a slowdown by the Meta team is noteworthy, but it does not come as much of a surprise and we believe that the macroeconomic weakness has been priced in.

With shares now trading at roughly 13x 2023 earnings estimates (though that may go up a bit should estimates be revised lower in coming days), about 5% of the market remaining under the current share repurchase authorization, Reels engagement tracking well and the fact that management has demonstrated a willingness to slow spending in order to protect profits through this downturn, we believe it would be wrong to sell META at this point. Ultimately patience through this economic downturn will be rewarded as advertising budgets ramp back up on the other side and topline growth reaccelerates. We would be buyers of META at this price.

Companywide Q2 results

Within the Family of Apps unit — which includes Facebook, Instagram, Messenger, WhatsApp and other services — advertising revenue of $28.15 billion came up short versus expectations of $28.52 billion while other services revenue came in at $218 million. Reality Labs — which includes augmented and virtual reality related consumer hardware, software and content — revenue came in at $452 million, ahead of expectations of $397 million.

As for profitability, Family of Apps operating income came in at $11.16 billion, missing expectations of $11.98 billion. Reality Labs reported an operating loss of $2.81 billion, smaller than the $3.62 billion loss the Street was anticipating.

Meta repurchased $5.08 billion worth of shares during in the quarter and ended with $40.49 billion in cash, cash equivalents and marketable securities on the balance sheet. As of the end of the second quarter, Meta had $24.32 billion remaining under its share repurchase authorization, representing about 5% of the company’s market cap.

Quarterly engagement

• Facebook Daily Active Users (DAUs): 1.97 billion versus 1.96 billion expected.

• Facebook Monthly Active Users (MAUs): 2.93 billion versus 2.94 billion expected, with management attributing a roughly 200 million sequential decline to “internet blocks related to the war in Ukraine.”

• Facebook DAUs/MAUs came in at 67%, marking the second consecutive quarter at that level following six straight quarters at 66%.

• Facebook Global Average Revenue per User (ARPU): $9.82 vs. expectations of $9.83.

As for Family of Apps engagement metrics, which more broadly represent engagement across Facebook, Instagram, Messenger, and/or WhatsApp, the results were as follows:

• Family Daily Active People (DAP): 2.88 billion, up 4% year over year

• Family Monthly Active People (MAP): 3.65 billion, up a similar 4% year over year

• Family DAP/MAP came in at 79%, largely in line with the rate we’ve seen over the past two years

• Family Global Average Revenue per Person (ARPP): $7.91.

Notably, management commented on the release that ad impressions across the Family of Apps were up 15% year over year, though the average price per ad was down 14% year over year.

Reels commentary

In the second reported quarter, management noted that they have witnessed a 30% increase in time spent viewing Reels across Facebook and Instagram. Remember, the current headwind for the company is the adoption of Reels, which monetizes at a lower rate than Feed and Stories. That also means as Reels adoption increases, so too does the headwind — for now.

However, in the past, we saw the same dynamic with Stories. In the end, management pulled it off and grew monetization over time. For this reason, we’re very encouraged to hear management called out that monetization efforts for Reels is pacing ahead of their expectations and that the medium has not only exceeded the $1 billion annual revenue run rate milestone but is also ahead of where Stories was as identical times post-launch.

Guidance

Meta Platforms expects total revenue in the third quarter of 2022 (current quarter) to be in the range of $26 billion to $28.5 billion, short versus estimates of about $30.4 billion. Included in this outlook is an expectation for foreign currency fluctuations (strong U.S. dollar) to be a 6% headwind and an expectation that the weak advertising demand environment experienced throughout the second quarter will continue.

Serving to offset the lighter-than-expected revenue guide, management reduced full-year expense expectations to $85 billion to $88 billion from the $87 billion to $92 billion range previously forecast. Capital expenditures (capex) guidance was tightened to a range of $30 billion to $34 billion versus $29 billion to $34 billion previously forecast and above the $29.12 billion consensus.