Shares of Meta Platforms Inc. (META, Financial) skyrocketed last year, driven by the artificial intelligence rally.
In 2023, Mark Zuckerberg pledged for a"year of efficiency," meaning the social media company would invest most of its dedicatory work into improving its products with an AI touch, cutting down costs with new initiatives to enhance user engagement.
This would then solidify its operational foundations to see Meta register a solid financial performance in the fourth quarter and for all of 2023.
During the earnings call, Zuckerberg noted Meta's applications enjoy global use by at least one out of every 3.1 billion people.
Finally, on the current route and strategic stakes, the company stands some chance to beat the Wall Street community's average target price of around $491.55 in the coming months; it has a promising outlook for growth in market value.
Meta's Reality Labs segment surges
Meta carries out activities within two business segments. The first one is the Family of Apps, which encompasses all its social media platforms, including Facebook, Instagram, WhatsApp and others.
Its offerings in augmented and virtual reality are part of the other segment, Reality Labs.
Even though the Family of Apps contributes the highest revenues and profits, Reality Labs has been declining sharply over the past few quarters. Surprisingly, the fourth quarter finished in favor of the segment and brought in $1.07 billion in revenue, reporting an increase of 47.1% year over year on the back of higher sales of Quest 3, with expenses rising 14% to $5.7 billion due to research and developments and headcount costs, resulting in a $4.6 billion operating loss.
The good news is the Family of Apps has again compensated for Reality Labs; underperformance, building $39 billion in revenue and an operating profit of $21 billion. While the Family of Apps saves the day for Meta, accounting for about 99% of its total revenue, Reality Labs remains to be explored. The metaverse market is in its fledgling stages.
Source: Statista
By 2030, the global metaverse is expected to surpass $1.3 trillion, growing at a compounded annual rate amounting to 44.50% between 2022 and 2030.
Meta believes that AI-powered technologies will enable the next generation of AR, MR and VR to be much more powerful, opening up the scope for exciting innovations in Reality Labs.
As Meta develops its products, operating expenses will rise between $94 billion and $99 billion in 2024. The company did not provide specific figures, but it noted that Reality Labs' loss from operations would go through the roof for the year based on the forecast of operating expenses.
WhatsApp's business boom
In 2014, Meta purchased WhatsApp, the world's most popular messaging app, for $19 billion. Meta has since introduced the WhatsApp Business API that allows merchants to pay for certain application services. As of July 2023, WhatsApp Business reached over 200 million monthly active users worldwide. Revenue from the Family of Apps surged to $334 million in the quarter, marking an 82% increase, propelled by the robust growth in business messaging via the WhatsApp Business platform.
The company had announced in its previous quarterly results the launch of Meta Verified for businesses on Facebook and Instagram in a few countries, aiming to bring it to WhatsApp shortly after. Meta is also making good progress with the WhatsApp Channels product, which has now more than 500 million monthly active users since its debut in September 2023.
Additionally, Meta does have several other ways to profit from WhatsApp if it ultimately decides to monetize it, such as advertising or business-focused subscription plans and from functional mergers with other platforms.
WhatsApp currently stands at 2.78 billion active monthly users from 180 countries, and it is expected that the number will hit 3.14 billion by 2025. Meta has not taken an official stance on this either, and its vast monetization possibility is still in progress.
Source: Oberlo
Meta unleashes AI revolution
At the Connect conference last year, Meta presented its generative AI products: Meta AI, an advanced conversational assistant based on Llama 2, its large language model that will be integrated with Instagram, WhatsApp and Messenger.
The technology has already been integrated into the company's mixed reality headset, Quest 3, and its Ray-Ban Meta smart glasses, which launched in October. Both had a solid start.
While Quest 2 weighed on Reality Labs' segment performance in 2023, the AI-powered Meta Quest 3 has the potential to give a big boost. In respect of the fourth-quarter results, both products delivered well.
AI is capable of actually enhancing Meta's advertising platforms. Dependent on different types of advertising, the company's revenue from Family of Apps advertising reached $38.7 billion in the fourth quarter, which was 24% higher. With the digital ad market recovering in 2024, Meta's advertising revenue might soar further.
Moreover, Meta expects to be very aggressive this year in its AI, non-AI hardware and Reality Labs investments, likely making capital expenditures between $30 billion and $37 billion.
Despite the increasing expenses, management forecasts first-quarter 2024 revenue in the$34.5 billion to $37 billion range, implying a 20% to 29% increase over the prior-year quarter. The consensus for first-quarter revenue stands at $35.97 billion, which aligns with the company's forecast.
Robust finances drive dividends, AI investments and growth forecasts
Meta's balance sheet shows that it ended the fourth quarter with $65.4 billion in cash and marketable securities, comprising $18.4 billion in long-term debt.
Not surprisingly, in the last quarter, it also generated strong free cash flow of $11.50 billion. A healthy free cash flow balance allows the company to pay off its debt, fund future growth projects, pay dividends and undertake similar activities. Thus, the free cash flow balance also ascertains a better understanding of the company's financial health.
This free cash flow enabled Meta to start paying dividends to its shareholders. The company announced a dividend payment of 50 cents per share for the quarter, payable quarterly. In fact, surplus cash will also enable Meta to finance AI projects quite soon as it has predicted 2024 to be a year of heavy investment in the segment.
Wall Street expects Meta's revenue and earnings for 2024 to spike by 17.3% and 34.5%, respectively. Trading at 32 times its price-earnings compared to its historical average of 33 suggests the tech giant might be fairly priced. However, with the boost in earnings from AI and in light of 2024 U.S. elections with elevated advertising revenue, the company deserves a higher multiple, closer to 35, implying a target price of $520 in the short term.
However, the reasonable valuation is contingent upon the premise that Wall Street still continues to overlook Meta's generative AI capabilities, apart from its monetization potential for WhatsApp and Threads and yet other unexplored growth prospects at Reality Labs.
Takeaway
The incredible full-year results and a strong forecast for 2024 have boosted Meta's market cap over $1.2 trillion. Lastly, as Meta Platforms sails toward the future, the integration of AI could pave the way for a smoother ride, making the stock a compelling growth at a reasonable price play, with additional upside potential from current levels.
