Meta's Fundamentals Look Fragile Heading Into Q1 Report, Analyst Warns

Needham analyst Laura Martin reiterated Meta Platforms META with an Underperform rating on Wednesday.

Meta will report earnings on April 30, after the close.

Martin worried about downward revisions to fiscal 2025 revenues, margins, EPS, free cash flow and upward revisions to CapX and reality lab losses.

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The analyst’s Meta estimates for first-quarter 2025 and fiscal 2025 are well below consensus estimates; she worries about the risks to Meta’s fiscal 2025 fundamentals.

Martin projected first-quarter revenue of $40.60 billion (Factset consensus of $41.36 billion) and adjusted EPS of $4.82 (Factset consensus of $5.24 billion).

On April 14, Meta CEO Mark Zuckerberg testified during its FTC antitrust trial that the share of time people spend on Facebook and Instagram has “gone down meaningfully.” Specifically, Meta disclosed that time spent viewing content posted by friends decreased from 22% to 17% on Facebook and from 11% to 7% on Instagram between 2023 and 2024.

The analyst’s channel checks indicate that Meta’s ROAS for many clients has fallen below its historical 1.80x. SMBs have been moving money out of Meta into higher ROAS alternatives, including performance-CTV, with yields of 2.5-4.0x.

Martin projected that operating expenses would reach $113 billion, up nearly 20% from the previous year. While the goal of these investments is to bolster long-term revenue growth, Meta’s near-term P&L may require downward earnings revisions, as it sacrifices near-term margins and free cash flow.

Based on Meta’s comments, Martin projected Reality Labs (RL) losses to rise 35% to $24 billion in fiscal 2025.

Martin does not expect Meta to cut its CapX guidance of $60 billion-$65 billion in 2025 for its GenAI infrastructure because they see this as an essential 10-year investment. However, tariffs add risks of upward cost revisions. Also, according to The Information, Meta has actively tried to get financial support from Microsoft Corp and Amazon.Com Inc for Llama, which underscores the enormous costs required to compete with Alphabet Inc‘s Google and OpenAI’s proprietary LLMs.

Price Actions: META stock was up 4% to $520.40 on Wednesday.

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