Meta Platforms Inc. (META, Financial) owns some of the world's largest social networks, which include Facebook and Instagram, in addition to chat apps such as WhatsApp and Messenger. The company recently launched a new text-based social media platform called Threads, which became the fastest-growing app in history.
This, along with releasing strong second-quarter results on Wednesday, has pushed the stock upward.
In this discussion, I will break down Meta’s second-quarter results and its business tailwinds, which include artificial intelligence. Let’s dive in.
Super financials
Meta reported solid financial results for the second quarter of 2023. Its revenue of $32 billion increased 11% year over year and beat analyst forecasts by $969 million.
This growth rate was faster than the prior four quarters, which reported between -4.47% and 6.64% year-over-year growth rates. This poor past growth was not helped by iOS privacy changes and monetization issues with Reels.
Therefore, the top line was surprisingly solid, especially given the macroeconomic pullback in the advertising industry, of which Meta is in a duopoly along with Alphabet Inc. (GOOG, Financial) (GOOGL, Financial).
The company reported 3.88 billion monthly active people across its family of apps, up 6% year over year, while its Facebook monthly active users totaled 3.03 billion, up 3% year over year. These are also positive results given the company had previously reported a slowdown in user growth.
From a monetization standpoint, its advertising impressions rose by 34%, but the average price per ad was down 16% year over year. This was driven by the aforementioned headwinds in the market, which governs ad prices as it is based on an auction system.
The company's management highlighted during the earnings call that “AI recommended content” based on accounts one does not follow is the fastest-growing category on Facebook. This algorithm change has resulted in a 7% increase in time spent on the platform.
Reels has also continued to grow, with 200 billion views per day, and its annual revenue run rate surpassed $10 billion. However, the company does still expect Reels to monetize at a “lower rate” than Stories and Feed.
For overall advertising revenue, online commerce was the largest contributor to growth, followed by entertainment and consumer packaged goods. By region, North America still had one of the slowest ad revenue growth rates, up just 11% year over year. In comparison, emerging markets were up 16% year over year and are considered a key growth driver for Meta.
The overall average revenue per user rose to $10.63, topping analyst forecasts of $10.22.
AI models, Threads and the Metaverse
Meta Platforms has publicly released its open-source Llama model, which is expected to be free for those platforms with up to 700 million users. Microsoft (MSFT, Financial) and Alibaba (BABA, Financial) have already announced integration options for the model, though Meta will charge them for the usage.
The company believes that open sourcing the model will result in efficiency gains as many independent coders find and fix bugs.
On July 5, Meta launched Threads, its text-based social media platform. This sparked outrage from Twitter (now known as X), which believed the platform had copied its features.
Either way, Threads became the fastest-growing app in history, reaching 100 million users in just five days.
It is still early days for the platform, so it will likely have issues with user retention. During the earning call, Mark Zuckerberg said the company will focus on “retention and improving the basics.”
The launch of this platform also shows how a lean team of people (believed to be around 30 of Meta’s best) can create a new platform, even during a “year of efficiency.”
Zuckerberg is also still building out his vision for the Metaverse. The company's Oculus plans to launch its widely anticipated Quest 3 headset, which is 40% thinner than the Quest 2, and includes Qualcomm’s (QCOM, Financial) high-powered chipset, which helps drive twice the performance. Meta is now focusing on improving retention for its horizons virtual reality world and also announced the widely popular Roblox game is coming to Quest.
Profitability and expenses
Moving onto profitability, Meta reported net income of $7.79 billion, which is up from $6.69 billion in the prior-year quarter.
This was positive given the company also reported total expenses of $22.6 billion, which rose 10% year over year on the back of higher cost of revenue due to infrastructure-related expenses. In addition, the company recorded an 8% increase in research and development expenses related to Reality Labs and the family of apps. Meta also reported a 39% increase in general and administrative expenses as a result of high legal costs.
The company reported $11 billion in free cash flow and bought back a solid $793 million worth of its own stock.
Meta Platforms has a strong balance sheet with cash, cash equivalents and short-term investments equal to $53.45 billion. In addition, it has long-term debt of $18.38 billion.
Valuation
Meta’s share price has risen by approximately 130% since the start of 2023. However, its price-sales ratio still stood at 6.60, which is lower than its five-year average.
The GF Value Line also indicates a fair value of $397 based on its historical ratios, past financial performance and analysts' future earnings projections. Therefore, the stock is modestly undervalued at the time of writing.
Final thoughts
At the end of 2022, when Meta was facing challenges, I noted its future is really a bet on how well Zuckerberg can execute. In this case, the founder and CEO has rapidly improved the business by both improving its core users and revenue, while also cutting costs and releasing new products. The future looks bright for Meta and, as the advertising market recovers, it should continue to grow its revenue.
