adminMeta Platforms (NASDAQ:META), one of the key holdings in the barbell portfolio, recently reported 3Q23 results and the company was sold off after earnings.
In this report, I will share more about the 3Q23 results as well as my views on it.
3Q23 was ahead of expectations
Meta’s 3Q23 results were better than expected.
Revenues for 3Q23 came in at $34.1 billion, up 23% from the prior year and 2% above consensus.
Operating income came in at $13.7 billion or 40.3% operating income margin, 22% above expectations as Meta continued to drive costs and expenses down by 7% from the prior year. Headcount also saw a decrease of 24% from the prior year, to 66,185 as of September 30, 2023.
As a result, GAAP EPS came in at $4.39, 22% above consensus.
Family of Apps revenue came in at $33.9 billion, growing 24% from the prior year, and 3% above consensus. There were positive contributions from each region: US & Canada was up 17% from the prior year, Europe was up 35% from the prior year, APAC was up 19% from the prior year, and Rest of World was up 36% from the prior year. Family of Apps Operating Income came in at $17.5 billion, or 51.5%, 10% above expectations.
Reality Labs revenue was down 26% from the prior year to $210 million, 36% below expectations and operating loss was at $3.7 billion, in-line with expectations.
Guidance
Meta guided 4Q23 revenues to be between $36.5 billion to $40 billion, up 13.5% to 24% from the prior year. This was 2% below consensus at the midpoint and there is an assumption of 2% foreign exchange tailwind in that guidance.
For the rest of 2023 outlook, Meta lowered guidance for total expenses by 2% at the midpoint, from the range of $88 billion to $91 billion to the range of $87 billion to $89 billion.
The 2023 guidance for capital expenditures was also lowered by 2% at the midpoint from the range of $27 billion to $30 billion to the range of $27 billion to $29 billion.
Expectations for 2024 expenses and capital expenditures were also lower than expected.
Meta also guided 2024 expenses to be between $94 billion to $99 billion, which is in-line with consensus expectations at the midpoint.
This is driven by higher costs related to infrastructure, growth in headcount in priority areas resulting in the mix shifts towards technical roles which costs more, and investments in augmented reality and virtual reality to continue to focus on product development for the Reality Labs business in order to scale its ecosystem
Meta also guided 2024 capital expenditure to be between $30 billion to $35 billion. The growth in capital expenditures is due to investment in servers, including both AI and non-AI hardware, and investment in data centers as Meta continues to ramp up construction of sites with its new data center architecture.
Reason for weak 4Q23 revenue guidance
While the advertiser demand trends were strong in Meta’s key segments, the company started to see more volatility at the start of 4Q23.
As a result, the company is guiding a wider range for the top-line to capture this uncertainty.
While Meta does not have material direct revenue exposure to Israel and the Middle East, since the start of 4Q23 which coincides with the start of the conflict, the company has seen softer ad spending and that is what was captured in the weaker 4Q23 revenue outlook.
While the demand softness cannot be directly attributable to recent geopolitical events, management shared that historically, they have seen broader demand softness after regional conflicts like the Ukraine war so the team is monitoring this closely.
I think that Meta is trying to be prudent and cautious with its 4Q23 outlook here based on what are the latest trends that they have seen and the volatility in the landscape today.
With this prudent and cautious guidance taking into account geopolitical events, I do think that the guidance will prove to be conservative.
Based on 3Q23, the business fundamentals are growing stronger while the execution continues to be stellar. With the improving engagement trends, increasing monetization traction and opportunities as well as continued investments in its key priorities, I do think that despite the weaker-than-expected guidance, Meta has the opportunity to beat these lowered expectations.
Engagement continues to improve
There were many other things to like in Meta’s 3Q23 results .
Overall engagement on Facebook and Instagram remains strong.
Meta continued to see gains in engagement from AI content discovery improvements. Specifically, in the US and Canada, AI-recommended content from unconnected accounts continues to drive incremental engagement.
For example, the DAP/MAP ratio reached 79.3%, which is yet another all-time-high for the company.
AI-driven feed recommendations have led to an increase of 7% year-to-date in the time spent on Facebook and 6% increase in Instagram.
These improvements in engagement come as a result of continued improvements to its AI-recommendation systems and the company continues to see more opportunities to drive engagement as they deploy more advanced models.
Threads is now a 100 million monthly active user platform, with management suggesting that it could reach one billion monthly active users over time. It is hard to imagine any other company that can get to 100 million monthly active users in just three months in so the progress for Threads has been great. I think this definitely has potential as we are literally in the early days and it’s all about building the community for now.
Launch of new products
Meta’s product development cycle continues to expand, especially in the space of AI.
Meta AI was launched recently, and it acts as an AI assistant where users can ask questions for real-time information and generate images as well.
AI Studio’s first version was also launched with several initial AI characters that users can interact with.
Meta plans to launch creator AIs in 2024 to help each creator have an AI that their fans can engage with.
Business AI is an exciting one for Meta within the business messaging space, which the company will continue to work on in 2024 and it is currently in an early alpha phase.
Also, Meta is building foundation models like Llama 2 which is one of the leading open source models with more than 30 million downloads in just the last month.
Lastly, Meta is ramping up social commerce with Shop ads.
Monetization catalysts
In addition, Meta has multiple monetization catalysts coming up.
Facebook and Instagram Shop ads are seeing early traction in 3Q23 as Meta expanded commerce integrations with third party services, making it simpler for businesses to set up and run Shops ads.
Advantage+ Shopping was launched only in August 2022 and this is now running at $10 billion ARR.
The monetization of Reels has been phenomenal and the progress that has been made is better than what management expected.
Reels is now estimated to be net neutral to the overall Meta ad revenue.
Reels has certainly come a long way from just an early emerging initiative last year to one that is a core part of Meta’s Family of Apps today.
I continue to see a visible path for continued ad load expansion and for the monetization of Reels to ramp further in 2024.
Lastly, I continue to see the potential in business messaging and specifically, WhatsApp.
There are currently more than 600 million conversations between people and businesses daily on its platforms. Management gave an example in India, where more than 60% of people on WhatsApp message a business app account every week as an example of what it could look like if this scaled globally outside of India. I found this very useful in understanding the global opportunity, but the click-to-message ads revenue in India has doubled from the prior year and this underscores the huge global opportunity.
I do not think this is priced in yet, but business messaging could be the next major pillar of growth for Meta. Today, most of the business messaging happens in countries with low cost of labor. The opportunity here is to help businesses set up an AI that customers can message for commerce and support, especially in countries where cost of labor is higher, and this could help businesses drive costs down while making business AI work for them. This is a focus for Meta going into 2024.
Click-to-WhatsApp ad revenue is now at a multi-billion dollar annual run-rate and it continues to grow very quickly. The next opportunity here is to use AI to help businesses message and engage with customers more efficiently at scale. The team at Meta is currently testing AI capabilities with a few partners to get the right experience for the future and the company is also excited about the potential for paid messaging that will complement click-to-messaging ads.
Strong ad growth
The ad revenue strength was global.
In particular, as highlighted before, Europe and Rest of World was up more than 35% from the prior year, while US & Canada and APAC were up more than 15% from the prior year.
In 3Q23, the global ad impressions were up 31% from the prior year while the average price per ad fell by 6%.
The strong growth in impressions was contributed by Rest of World and APAC.
The decline in pricing was a result of the solid impression growth, especially in its lower monetizing surfaces and regions.
Year of efficiency continues as Meta invests in four key priorities
For Meta’s 2024 budget, there are four key priorities in which the company plans to allocate incremental headcount. These four key priorities are AI, infrastructure, Reality Labs and monetization, as well as towards its regulatory and compliance needs.
As expected, AI will be the largest area of increased investment as Meta continues to invest in generative AI across its core products, internal tooling as well as its research work.
That said, the year of efficiency will continue into 2024 as the company expects to continue its focus on improving efficiency and reduce hiring in other areas of the company that are less of a priority in 2024.
As a result 2024 expense guidance was better than expected, growing 14.5% from the prior year at the midpoint after excluding the one-time charge in 2023.
Valuation
I have rolled forward Meta’s 5-year financial forecasts and revised the financials upward to reflect the improving fundamentals. They imply a 5-year revenue CAGR of 10% and 5-year EPS CAGR of 12%, excluding any potential buybacks.
The 1-year price target goes up to $435, based on 25x 2024 P/E respectively.
Conclusion
The 3Q23 results showed that the online advertising environment is improving globally. For Meta, its business fundamentals have never been better, with record high engagement levels and the beginning trends for Threads looks encouraging.
Monetization opportunities have been increasing as Reels becomes net neutral to the overall Meta ad revenue and business messaging, Shop Ads and Advantage+ Shopping ramps up.
Along with these monetization opportunities, Meta is showing itself to be an AI powerhouse in its field, with a strong ramp and roll out of new AI products this year and in 2024, highlighting a strong product roadmap going forward.
For 2024, the better-than-expected expenses and capital expenditures guide, as well as 3Q23 management commentary suggests that Meta will continue to focus on efficiency gains going forward and run a disciplined and lean ship to ensure stability in a volatile world while investing in its long-term goals.
I am more than happy to continue to hold the course with the Meta position in the barbell portfolio and if there are any disconnects between the share price and fundamentals, I would be a buyer of the company.
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