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Meta Platforms: Improved Execution and Results Buy Time for Metaverse Bet

Published 07/27/2023, 03:36 PM
  • Meta Platforms shares jumped on Wednesday after the tech behemoth reported better-than-expected results
  • Q3 revenue outlook easily beat analyst expectations
  • Investors were happy to hear about improved Reels monetization
  • Meta Platforms (NASDAQ:META) shares were seen trading more than 7% higher on Wednesday morning after the social media company reported a solid set of second-quarter results and Q3 forecast that topped analyst expectations.

    The company’s Q2 revenue of $32 billion is a result of the 11% year-over-year increase, topping analyst expectations by nearly $900 million. On the bottom line, earnings per share were reported at $2.98, just ahead of the Street at $2.92. Meta’s operating margin was unchanged YoY at 29%, while analysts were expecting an expansion by 140 basis points.

    "We had a good quarter. We continue to see strong engagement across our apps and we have the most exciting roadmap I've seen in a while with Llama 2, Threads, Reels, new AI products in the pipeline, and the launch of Quest 3 this fall," said Mark Zuckerberg, Meta founder and CEO.

    One of the key takeaways from the Q2 earnings report from the investor standpoint is the improved Reels monetization. Meta said Reels plays topped 200 billion per day across Facebook (NASDAQ:META) and Instagram and the company is making “good progress” on the monetization front as the annual revenue run-rate now exceeds $10 billion.

    Better Than Expected Results and Guidance

    The company generated as much as $31.5 billion from advertising, an increase of 12% YoY. Family of Apps – which includes Facebook, Instagram, and WhatsApp – also saw its sales rise 12% YoY. At the end of Q2, Facebook had 2.06 billion daily active users, up 4.6% YoY, while the number of monthly active users exceeded $3 billion after rising 3.4% YoY.

    Looking forward, the company sees Q3 revenue between $32 billion and $34.5 billion, easily ahead of the consensus $31.18 billion. This is likely the key reason why Meta shares jumped in after-hours Wednesday trading.

    The stock jump occurred despite Meta increasing its full-year total expenses forecast to $89.5 billion from the prior $88 billion. A couple of quarters ago, this would be a much bigger issue for investors, but the improved execution in recent quarters has bought more time and investor credit for Zuckerberg & Co.

    The company said that the expenses outlook hike is driven by about $4 billion in restructuring costs “related to facilities consolidation charges and severance and other personnel costs.” Meta labeled 2023 as a year of efficiency as the company slashed more than 20,000 jobs.

    As a result, the total headcount fell 14% YoY to 71,469. Speaking on the earnings call, Zuckerberg said that he wants Meta to be “as lean as possible” and the company will continue to hire in key areas.

    Meta also cut its CapEx FY outlook to $28.5 billion from the prior $31.5 billion. This is driven by cost savings with the company highlighting it will be spending less money on non-AI servers. Moreover, Meta shifted some of its CapEx to 2024 due to “delays in projects and equipment deliveries.”

    “Looking ahead, while we will continue to refine our plans as we progress throughout this year, we currently expect total capital expenditures to grow in 2024, driven by our investments across both data centers and servers, particularly in support of our AI work,” CFO Susan Li said in a press release.

    AI in Near Term, Metaverse in Long Term

    Meta’s Reality Labs segment, which is focused on Metaverse, generated just $276 million in sales, representing a 39% drop YoY and sharply below expectations of $391.9 million. This business also generated an operating loss of $3.74 billion as Meta continues to invest heavily in what it believes will be a key revenue generation stream in the long term.

    The company said it expects Reality Labs’ operating losses to increase year-over-year in 2023 “due to our ongoing product development efforts in augmented reality/virtual reality and investments to further scale our ecosystem.”

    Zuckerberg refused to give a number on what Meta will be spending on AI-focused projects, saying that the company still doesn’t have a clear handle on this until later in the year.

    “Investments that we've made over the years in AI, including the billions of dollars we've spent on AI infrastructure are clearly paying-off across our ranking and recommendation systems and improving engagement and monetization. AI recommended content from accounts you don't follow is now the fastest-growing category of content on Facebook's feed,” he said.

    In addition to AR/VR projects, Meta also launched the Threads platform at the start of Q3, which is seen as a key rival for Elon Musk’s Twitter. The app attracted more than 100 million users in a matter of days. Speaking on the earnings call, CEO Zuckerberg said he is “quite optimistic” about the project’s trajectory.

    “We saw unprecedented growth out-of-the-gate. And more importantly, we're seeing more people coming back daily than I'd expected. And now we're focused on retention and improving the basics. And then after that, we'll focus on growing the community to the scale that we think is going to be possible. Only after that we are going to focus on monetization,” Zuckerberg noted.

    This trajectory is in line with analyst views that Meta won’t initially focus on making Threads profitable. As it did with Facebook, Instagram, WhatsApp, Stories, and Reels, Meta would want to focus on retention and having a solid core product.

    Another positive for investors is that Zuckerberg played down costs related to starting the Threads launch. He said the project was implemented “by a relatively small team on a tight timeline.”

    “The year of efficiency was always about two different goals, becoming an even stronger technology company and improving our financial results, so we can invest aggressively in our ambitious long-term roadmap,” he added.


    Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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