Facebook’s parent company, Meta Platforms Inc, is set to report its Q3 earnings on Wednesday, September 26, after Wall Street’s closing bell. The social media behemoth is going to face an extremely tough year-on-year comparison as the global economic slowdown has severely weighed on advertisement revenue, while Metaverse is not progressing at the anticipated pace. Aside from that, the firm has been experiencing fierce competition and an alarming number of idiosyncratic risks, causing its share price to nosedive more than 60% year-to-date. 

Not a good year for tech stocks

In 2022, the Fed’s ongoing rate hike cycle to counter inflation has triggered a broader sell-off in tech stocks. Specifically, the aggressive tightening policy has triggered panic in bond markets, pushing bond yields higher, which subsequently cause discount rates to increase and valuations to decrease accordingly. This development is extremely negative for tech companies as their performance heavily relies on their growth prospects, while higher interest rates could also discourage borrowing, reducing firms’ dry powder for new investments and developments.

To make matters worse, Meta has been the worst performing stock of the FAANG clan, severely hurt by rising competition and firm-specific risks. Meanwhile, just yesterday Snap reported disappointing Q3 earnings figures and hinted that its advertising segment will likely decelerate in the next quarter, indicating that the digital ad sector would probably continue bleeding in the upcoming months.

Meta succumbs to fierce competition

In the last couple of years, Meta has been facing increased competition from short-form video platforms like Snapchat and TikTok, where users prefer to spend more of their leisure time, curtailing the time spent on Meta’s social media platforms. In response, Meta has been developing a similar type of short videos called Reels, but they have not yet managed to monetize at higher rates than existing products like Feed and Stories. This intense competition led to the firm’s revenue per user number declining for the first time in history in the second quarter, while it is not anticipated to recover in the upcoming report.

Ad business in trouble

During the last year, the changes in privacy settings introduced by Apple have made it much harder for Meta to collect the necessary data to track people’s online behaviour so as to provide them with advertisements relative to their interests and needs. This development has largely weighed on Meta’s revenue as marketers will prefer to allocate their capital to platforms that can advertise products to a more targeted audience such as Alphabet, which snatched a licensing deal with Apple.

Unfortunately, these changes came at a time when demand for advertising has already started to wane as firms reduce spending due to increasing fears over an upcoming global recession. Under this context, the social media giant is expected to post a 4.58% annual decline in ad revenue in Q3, with the figure falling from $28.15 billion to $26.91 on a quarterly basis.

Metaverse does not live up to expectations

Meta has invested heavily in the so-called Metaverse and recently held its annual event to showcase the latest developments. Nevertheless, Metaverse is not expected to provide any financial benefits soon, with the firm having already spent around $16 billion since early 2021. The innovative project might prove to be the name of the game in the upcoming years but for now it is just an extremely expensive investment, which has reduced investment spending towards the improvement of the enterprise's core business.

Devastating quarter as headwinds persist

The upcoming earnings report will likely reflect the impact of the aforementioned downside risks on Meta’s fundamentals as the company is expected to extend its streak of negative financial performances. Specifically, forecasts by Refinitiv analysts suggest that earnings per share (EPS) are expected to fall from $2.46 in the last quarter to $1.89, which would represent a massive year-on-year drop of 41.22%. Revenue is projected at $27.07 billion, falling 5.51% against the same quarter last year and marking the second consecutive annual decline.

Valuation collapses, hinting potential bargain

On the bright side, Meta’s valuation has reached its most attractive levels in years. The 12-month forward price-to-earnings ratio, which denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings, currently stands at 12.6x. This ratio is not only way lower than tech-heavy Nasdaq’s average multiple of 21.7x but also against S&P 500’s 15.3x.

Even though Meta faces substantial short-term challenges, it’s difficult to argue that the tech firm does not retain significant long-term growth prospects. Considering that almost 40% of the world’s population is actively using at least one of the company’s platforms, which include Instagram, Facebook and WhatsApp, even a moderate success of the firm’s recently launched products and a rebound in ad segment could lead to tremendous increases in income and profits.

Can the downfall come to a halt?

After a stellar 2021 in which Meta’s stock price marched to a new all-time high, 2022 brought a persistent weakness in the price action. Therefore, investors will be closely eyeing the firm’s Q3 earnings release for signs of fundamental strength even if macro and broader headwinds are multiplying.

To the downside, disappointing earnings could send the price to test the 2022 low of $122.00 before the spotlight turns to the June 2016 support of $108.00.

On the flipside, bullish actions may propel the share price towards the recent support region of $155.00, which might now act as resistance. Higher, the $171.00 hurdle could curb any further advances.