The third-quarter earnings season is getting into full swing, and Big Tech companies like Meta Platforms (META), Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN) will all release their earnings reports this week.

With a YTD gain of over 162%, Meta is not only outperforming its FAANG peers by a wide margin, but it’s also the second-best performing S&P 500 Index ($SPX) stock – with its returns trailing only that of Nvidia (NVDA), which has almost tripled to become a trillion-dollar giant this year, thanks to the artificial intelligence (AI) boom.

Meta’s earnings and guidance surprised to the upside in both the first and second quarters of 2023. But will the reaction to Meta’s Q3 report on Wednesday, Oct. 25, be similarly upbeat? 

Here’s what Wall Street is expecting from Meta’s Q3 report, along with the 7 things that I would watch when the Mark Zuckerberg-led company reports its earnings.

Meta Q3 Earnings Preview

The Q3 earnings season has been mixed so far when it comes to tech names. While Netflix (NFLX) soared after its Q3 confessional as it shattered streaming subscriber estimates, shares of Tesla (TSLA) – valued by many analysts as a tech name, as opposed to a traditional automaker – crashed on an earnings miss and tepid commentary from CEO Elon Musk.

As for Meta, the bar is set high in Q3, and the stock will need to justify its outsized 2023 rally. The company provided Q3 revenue guidance of between $32 billion-$34.5 billion – which, even at the low end, implies a YoY rise of 15%. Wall Street analysts expect Meta to report revenues of $33.4 billion for the quarter, which is towards the midpoint of the guidance and implies a YoY rise of over 20%. Nonetheless, even at the low end of Meta’s guidance, the company’s Q3 revenue growth should be the highest since Q4 2021.

Analysts expect Meta to report per-share earnings of $3.57 – a YoY rise of over 117%. While that growth sounds stellar, it is coming from a lower baseline in the year-ago period.

7 Things to Watch in Meta’s Q3 Earnings Report

While the headline metrics like revenues, profits, active users, and average revenue per user will be keenly watched in Meta’s Q3 earnings report, here are the 7 things that I will closely follow in the report:

1. Commentary on the Digital Advertising Market

Strong growth in the digital advertising market helped Meta report better-than-expected earnings in Q2. With the global macro environment deteriorating amid the Israel-Hamas war and the U.S. Fed signaling rates will stay higher for longer, I’ll be especially interested in Meta’s commentary on the digital advertising market – as a slowdown in that market could spell trouble for not only Meta, but also other social media companies. 

2. Ad-Free Version in Europe and Other Geographies

Meta’s data collection and targeted ad policies have been a bone of contention with several regulators – particularly in Europe. The company is reportedly considering a paid ad-free tier in Europe, which would help it address these concerns. During the Q3earnings call watch for the comments on the paid plan, including any proposal to roll out the program to other regions. 

3. Reels Monetization

During the Q2 2023 earnings call, Meta said that the annual revenue run rate of Reels – its short video format to compete with TikTok – is now at $10 billion, and has more than tripled over the last year. The company might provide an update on the monetization of Reels during the Q3earnings call

4. Impact of AI on Meta’s Earnings

During the Q2earnings call Meta said that almost all of the advertisers on its platform are using one of its AI products. Zuckerberg sees AI as a key driver in the short term, and I would watch for management’s commentary on the AI opportunity during the Q3earnings call

5. Q4 Revenue Guidance

Meta’s forward guidance has been quite impressive over the last few quarters. Analysts expect the company’s revenues to rise almost 21% in Q4. Meta’s Q4 guidance will be crucial, and could be among the key factors to drive the stock’s post-earnings price action.

6. What’s Next for Meta After the “Year of Efficiency”

Zuckerberg touted 2023 as the “year of efficiency”, and the company went overboard with cost cuts and headcount reduction. However, the “winning formula” that helped Meta recoup its 2022 losses might have run its course already, as the company expects its payroll expenses and operating expenses to increase in 2024. During the Q3earnings call Meta might shed some light on what could drive its 2024 performance. Incidentally, unlike 2023 – where Meta faced easier comps as its revenues fell YoY in the previous year – the social media giant will face much tougher comparisons in 2024.

7. Reality Labs Losses

Meta Platforms’ Reality Labs segment, which is building the metaverse, is posting massive losses, and the company expects losses to “increase meaningfully” in 2024. During the Q3earnings call listen for commentary on the Reality Labs segment – including the 2024 operating loss guidance, as well as the long-term trajectory of that business.

Meta Stock Forecast

Despite the rally in Meta’s stock, Wall Street analysts see further gains for the Menlo Park-based company, with the mean target price of $366.08 implying a rise of 16% over current prices.

Meta has received a Strong Buy rating from 34 of the 37 analysts covering the stock, while two rate it as a Moderate Buy. The remaining 1 analyst has a Strong Sell rating on the stock.

After Meta’s Q2 earnings release, several analysts raised the stock’s target price. Expect analysts to further raise the stock’s target price following this week’s Q3 results, if the company can impress with its Q3 earnings and Q4 outlook.

On the date of publication, Mohit Oberoi had a position in: META , GOOG , AMZN , MSFT , NVDA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.