Meta Platforms: Outpacing Peers in Ad Revenue, Maintaining Buy Rating
Meta Platforms (NASDAQ:META) continues to be our top pick in the FAANG group, and we maintain our buy rating for the stock. We anticipate higher ad revenue growth for Meta due to its unique positioning in the market with the Facebook OpenAI (FoA) and expect it to outperform its peers in this regard.
Meta’s ad revenue growth has surpassed that of its peers, recording a 19% YoY increase this quarter. The company’s FoA and Threads are expected to become lucrative ad platforms in the coming year, driven by new AI-enabled interactive services. The successful launch of Reels has already led to a 40% increase in time spent on Instagram, indicating improved user engagement.
Since our buy rating in late November, Meta’s stock has risen approximately 210%, surpassing the S&P 500 by 200%. The company’s focus on efficiency has resulted in lower expenses and improved operating margins. Despite macroeconomic uncertainty, Meta has managed to achieve profitable growth, with total costs and expenses declining by 7% YoY to $20.4 billion this quarter. Meta expects lower capex in 2023 and has provided more visibility into its capex expectations for 2024.
Monetization Increasing With an Improving Digital Ad Market
The company is expected to see further traction in ad spend as user engagement on Facebook and Instagram continues to improve, driven by AI-enabled interactive services. Meta’s AI features in advertising, such as multiple versions of ad text, image expansion, and Meta AI acting as an AI assistant, are expected to drive upside in 2024.
This quarter, Meta’s total FoA revenue increased by 53% YoY. The reacceleration in top-line growth is attributed to an improving digital ad market, new AI-enabled features, and increased ad spend ahead of the holiday season. Meta’s family monthly active people reached 3.96 billion, and ad impressions across FoA increased by 31% YoY. Although the average price per ad decreased by 6% QoQ, we anticipate ad spending to rebound in the coming year.
Risks and Valuation
Despite the company’s positive performance, there are potential risks to consider. Macro uncertainty, particularly related to geopolitical tensions, could impact ad spending. Moreover, legal issues faced by Meta, similar to Alphabet and Amazon, may affect performance in 2024, but we anticipate minimal impact on top-line growth.
In terms of valuation, Meta remains undervalued compared to its large-cap peers, with a lower P/E ratio and EV/sales ratio. As Meta’s growth rate is expected to accelerate in 2024, driven by improving ad spend and AI-enabled services, the stock presents attractive entry points for investors.
Wall Street Outlook
Wall Street analysts overwhelmingly share our bullish sentiment on Meta’s stock. The majority of analysts (52 out of 58) rate the stock as a buy, with a median price target of $368 and a mean price target of $380. This indicates a potential 23-27% upside.
Conclusion
We believe Meta’s strong performance in ad revenue growth, coupled with its cost reduction measures and AI-enabled offerings, positions the company for further growth in 2024. Despite short-term fluctuations, we remain confident in Meta’s longer-term growth trajectory and recommend investors explore entry points into the stock during any pullbacks.
