While many celebrated Meta’s turnaround in 3Q’23, where layoffs were a thing of the past, topline growth was on the rise, and margins were expanding, the stock has continued its dizzying ride, surging another ~60% since then, including an after-hours reaction on Thursday. For investors, the volatility of this big tech company has been no less than a thrilling rollercoaster.
From a ~75% plunge in 2022 to a staggering ~+400% ascent from the bottom in just 15 months, Meta’s shareholders have been through quite the ordeal. But what exactly transpired during Thursday’s call?
Shifting User Metrics
Prepare to bid farewell to Facebook’s DAU or MAU numbers, as Meta will cease reporting them from the next quarter. This change often sparks pessimism among investors, but fear not, for Meta will now provide YoY changes in ad impressions and average price per ad by region, along with reporting Family “Daily Active People” (DAP).
A deep-dive into region-level data may potentially offer investors more meaningful insights into the health of the Family of App’s (FOA) compared to the deprecated metrics, proving to be a silver lining for stakeholders.
Enhanced Engagement
Engagement, measured by DAU/MAU ratio, demonstrated a consistent QoQ improvement across all regions. The overall ratio has seen growth for the last eight consecutive quarters, signifying a positive trend.
ARPU Strength and Weakness
While ARPU displayed noticeable strength, a word of caution is warranted regarding the YoY comparison, as the 2-year CAGR may present a more accurate reflection of the long-term trajectory. As an easy comp quarter lies ahead, future growth is likely to reflect closer to long-term trends.
In 2023, annual ARPU in North America reached a staggering ~$220, raising questions about the potential upper limit, yet Meta’s ad infrastructure seems to be continuously strengthening, essential for further ARPU expansion.
Ad Revenue and Concerns
Ad impression grew by 21% YoY, while the average price per ad saw a 2% increase. Strong impression growth, particularly from lower-monetizing services and regions, coupled with advertiser demand and currency tailwinds, drove this uptick.
What’s more, China-based advertisers contributed 10% to Meta’s overall revenue in 2023, sparking some worries about the sustainability of this growth. Although recent stock price movements might indicate fading concerns, the potential fragility of this revenue stream remains a ever-present concern.
Segment Reporting Insights
4Q’23 saw a remarkable +25% YoY (+22% FXN) increase in revenue, while total expenses decreased by 8% YoY. Comparing this with Google’s advertising revenue during the same period, Meta’s topline growth of 9.1% (on a 2-year CAGR basis) outshines the competition.
Notably, FOA posted ~80% incremental operating margin in 4Q’23 vs. 4Q’21, a laudable feat for two consecutive quarters. However, this triggers a change in perspective. Such margins trigger contemplations of Mark Zuckerberg’s appearance at a recent Senate hearing, raising questions about the need for substantial efforts to shield users from potential harm. Intensive user protection measures, even at the expense of near-term margins, could bolster the company’s position in the long run, particularly as society’s and regulatory expectations continue to evolve.
Despite the belief that social media may not be harming today’s teens, Meta’s ability to adapt to these changing norms, coupled with recent instances of disappointing scammy ads, remains an area of concern, urging the need for further action.
Meta’s Earnings Call: A Rollercoaster of Insights
Okay, back to financials now.
Other revenue, which includes “business messaging” from WhatsApp, caught my eye with its rapid growth rate. Although it’s a small base currently, it soared by 82% YoY (2-yr CAGR 47%) and has piqued my interest for its potential in 2024.
Reality Labs has become a major concern for investors. While it achieved revenue exceeding $1 billion for the first time, courtesy of Quest 3 and Quest 2 sales during the Christmas season, the escalating losses offer no glimmer of hope.
In fact, Meta warned about the likelihood of “meaningful” year-over-year increases in operating losses for Reality Labs in 2024 due to ongoing AR/VR product development and ecosystem scaling investments.
Some Meta enthusiasts may be enticed to apply a sum-of-the-parts valuation by assigning Reality Labs’ worth as zero. I vehemently discourage this approach, as it should be evident by now that any notions of Meta “shifting from Metaverse to AI” are purely fictional.
Meta is unwavering in its commitment to AR/VR, and with Apple’s foray into this domain, it’s safe to say that Meta will compete vigorously against a company with over triple its revenue, benefitting from Apple’s entrenched dominance in the mobile computing realm.
I contemplate whether Meta could substantially scale back only if Apple chooses to exit the market due to a possible flop of Vision Pro. However, this scenario appears unlikely, and I anticipate a drawn-out competition between these two industry giants. Ultimately, my attention will primarily be on Meta’s consolidated figures.
Now, let’s delve into some intriguing comments from the earnings call:
Reels: Thriving Growth
We’re witnessing sustained growth in Reels and video overall, as daily watch time across all video types surged over 25% year-over-year in Q4, driven by continuous ranking enhancements.
Shop Ads: Impressive Milestones
Shops ads achieved a remarkable $2 billion annual run rate in Q4 after opening availability to all U.S. advertisers in Q2. Eligible Shopify businesses can seamlessly onboard to shops on Facebook and Instagram, making it easier for advertisers to convert their existing ads into shops ads. We are steadfast in our efforts to deepen integrations with partners and leverage AI to enhance the performance of shops ads.
WhatsApp: Building Momentum
WhatsApp Channels now boast 500 million monthly active users.
WhatsApp is also making significant headway, particularly in the United States, where there is a burgeoning demand for a private, secure, and cross-platform messaging app that caters to everyone. Given the strategic importance of the U.S. and its substantial revenue contributions, this represents an immense opportunity for growth.
Threads: Gaining Traction
Threads now boasts 130 million monthly active users, a notable increase from 100 million in Q3’23.
Open Source: Meta’s Unwavering Path
For the second consecutive quarter, Zuck endeavored to elucidate why Meta is pursuing the open-source trajectory:
One other aspect that caught my attention from Zuck’s prepared remarks is Meta’s access to data, regardless of the outcomes of the GenAI-related lawsuits:
Now the next key part of our playbook is learning from unique data and feedback loops in our products. When people think about data, they typically consider the corpus used to train a model upfront. On Facebook and Instagram, there are hundreds of billions of publicly shared images and tens of billions of public videos, which we estimate exceed the common crawl data set. Additionally, people share substantial volumes of public text posts and comments across our services.
AR/VR: Steadfast Focus
“Our focus for this year is going to be on growing the mobile version of Horizon as well as the VR one.”
I’m enamored with my Ray-Ban Meta smart glasses, and it seems even Meta was surprised by the demand:
The Ray-Ban Meta smart glasses have made an exceptionally robust debut in terms of sales and engagement. Our partner, EssilorLuxottica, is gearing up to produce more than our initial projections due to the soaring demand. Engagement and retention rates also surpass those of the first version of the glasses.
Capital Allocation: Unexpected Moves
Meta repurchased an astounding $6.3 billion last quarter ($20 billion for the whole year). What was slightly surprising was Meta’s initiation of a dividend of $0.5/share.
Despite a 22% YoY reduction in headcount, Meta has commenced hiring once again, with headcount increasing by approximately 1,000 QoQ.
Opex Guide: Unchanged Projections
Meta upheld its opex guide at $94-99 billion. Based on historical trends, investors typically anticipate Meta to either decrease the opex guide over time or align with the lower end of the projection. I wonder if this assumption remains pertinent under Susan Li’s leadership.
Capex: Scaling Investments
The capex guide range was raised from $30-35 billion to $30-37 billion in 2024.
Meta Platforms: A Peek into the Future Amidst Controversies and Growth
Meta Platforms, formerly known as Facebook, is forging full steam ahead into a future fueled by AI, data centers, and innovative infrastructure. Mark Zuckerberg, Meta’s CEO, recently made a bold announcement, indicating that the company is poised for significant growth.
Investing in Cutting-Edge Technology
Meta Platforms is gearing up to bolster its capabilities by investing in state-of-the-art servers, including AI and non-AI hardware, and expanding its data center footprint. This strategic move demonstrates Meta’s commitment to staying at the vanguard of technological advancements in the digital landscape.
Reflecting on the lessons learned from past endeavors, particularly the underestimation of computing capacity required for the Reels service, Zuckerberg expressed his firm resolve to avoid similar pitfalls in the future. He emphasized the necessity of building ample capacity to support both existing and potential AI services, affirming that the company is prepared to meet the escalating demands for compute-intensive operations as they evolve over time.
Efficiency and Lean Operations
Despite the company’s impressive financial performance, Zuckerberg is resolute in his belief that maintaining a lean structure is pivotal for sustainable success. He underscored the importance of fiscal prudence, especially in the face of unpredictable geopolitical and technological landscapes. This steadfast commitment to lean operations, aimed at enhancing execution agility and resilience, remains a core tenet of Meta’s operational philosophy.
Regulatory Hurdles and Business Outlook
Notwithstanding the company’s ambitious growth trajectory, Meta Platforms is navigating a complex regulatory environment. The Federal Trade Commission (FTC) is seeking substantial modifications to an existing consent order, posing potential challenges to Meta’s operations. While the company is contesting these regulatory actions, the outcome could have far-reaching implications for its business.
Looking ahead, Meta Platforms has set a topline guidance for the fourth quarter of 2023, projecting substantial growth with a midpoint estimate of $34.5-37 billion, representing a remarkable 25% year-over-year increase.
Candid Reflection and Investment Perspective
Amidst the fervor surrounding Meta’s meteoric stock performance, a candid observer might wonder if there is any remaining upside potential. The prevailing sentiment of “the easy money has been made on Meta” has gained traction, prompting introspection among investors, including seasoned ones.
Expressing a mix of contemplation and trepidation, investors and analysts are collectively grappling with the enigma of Meta’s future prospects. Personal reflections and investment approaches to Meta’s stock mirror the broader sentiment, encapsulating the delicate balance between reward and risk inherent in contemporary investment decisions.
Notably, acquiescing to the intricate interplay of market dynamics, doubts, and triumphs, investors are poised to gain a deeper understanding of Meta’s narrative—the soaring successes, occasional setbacks, and the compelling allure of future potential.
For those seeking a more comprehensive analysis of Meta Platforms, an in-depth examination is available, offering valuable insights into the company’s trajectory and prospects.
Disclosure: I own shares and 2025 January $50 Call Options of Meta.
