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Meta Q3 2023 Earnings Review

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Meta (NASDAQ:META) had a fantastic third quarter, delivering strong results that surpassed expectations. Despite a modest after-hours dip in stock price, the reaction is understandable considering the uncertainties surrounding future advertising scenarios.

Users

Since the fourth quarter of 2019, Meta has added a staggering 880 million Daily Active Users/People (DAU/DAP) to its Family of Apps (FOA) properties. To put it in perspective, this is equivalent to adding more than two entire user bases of a major competitor like Snap (SNAP) in less than four years!

Engagement

DAU/MAU engagement has remained solid across all regions, with the overall ratio experiencing consistent growth for seven consecutive quarters.

ARPU

The Average Revenue Per User (ARPU) has shown significant strength, although the year-over-year comparison reveals a slight weakness. It’s worth noting that the two-year Compound Annual Growth Rate (CAGR) provides a better reflection of the long-term trend.

Ad Revenue

The number of ad impressions grew by 31% year-over-year, while the average price per ad declined by 6% YoY. This was mainly driven by higher impression growth in APAC and RoW regions, as well as lower monetizing surfaces like Reels.

Segment Reporting

The overall revenue grew by 23% year-over-year, while total expenses decreased by 7%. The advertising business of Meta outpaced competitors like Google, with a 2-year CAGR of 9.1%. Notably, Meta’s ad revenue growth was driven by online commerce, Consumer Packaged Goods (CPG), and gaming, with strong demand from Chinese advertisers.

Reels

The Reels feature has experienced remarkable success, contributing to a 40% increase in time spent on Instagram since its launch. It has also reached a monetization milestone, now being net neutral to revenue. Going forward, Reels is expected to provide a modest boost to revenue in 2024.

Business Messaging

Meta’s platforms facilitate over 600 million conversations between people and businesses daily, with a significant number of people on WhatsApp in India engaging with business accounts. Click-to-messaging ads in India have also doubled year-over-year. The revenue from business messaging is included in FOA’s β€œother revenue,” which experienced a 53% YoY growth driven by WhatsApp’s Business Messaging.

AI

Meta’s recommendation system, powered by AI, has led to a 7% increase in time spent on Facebook and a 6% increase on Instagram in 2023. The company’s AI tools for advertisers, such as Advantage+ shopping campaigns, have generated a $10 billion annual run rate. Meta views AI as a significant investment area for 2024 and aims to leverage its AI capabilities to generate and edit more content for users.

Efficiency

Meta plans to allocate incremental headcount towards key company priorities in 2024, including AI, infrastructure, Reality Labs, monetization, and regulatory compliance. While the hiring rate will be slower, Meta recognizes the importance of AI and plans to deprioritize non-AI projects to redirect resources. The company’s open-source initiatives, like Llama 2, aim to drive innovation and improve efficiency in CapEx expenses.

Metaverse

Meta’s Reality Labs is working on building the future of online interactions and expects to have synergies with the Family of Apps in the near term. Meta envisions a world where smart glasses, coupled with its Meta AI assistant, enable users to have enhanced experiences and capture content from a first-person point of view. The company sees tremendous potential in AI-driven content generation for personalized user experiences.

Capital Allocation

Unlike previous quarters, Meta has not been actively buying back shares, possibly due to pending tax payments. The company’s Stock-Based Compensation (SBC) per employee has increased, potentially influenced by the stock’s performance. Meta remains focused on capital efficiency and reducing planned hiring in certain areas while ensuring incremental investment in key growth areas.

Regulation

Meta acknowledges the legal and regulatory headwinds in the European Union (EU) and the United States, which may impact its business and financials. The company is actively engaging with regulatory authorities and working on consent models to address these concerns. Updates on the EU regulatory landscape are expected in the future.

Outlook

For the fourth quarter, Meta projects a revenue range of $36.5-40 billion, with continued strong advertiser demand. However, some volatility at the start of the quarter, possibly related to geopolitical events, influenced the wider guidance range. Meta remains vigilant in monitoring the revenue outlook and regulatory landscape.

Closing Thoughts

Meta’s strong performance in Q3 2023 demonstrates its resilience and ability to navigate challenges, such as the impact of regulatory environments. The company’s focus on AI, engagement, and monetization sets the stage for continued growth and innovation in the digital landscape. As a shareholder, regulation remains a key concern, but Meta is proactively addressing these issues to ensure its long-term success.

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