What a difference a year makes. Last year when Meta Platforms (META -0.28%) released its fourth-quarter 2021 earnings report, Wall Street booed, and the stock dropped 26% as investors worried that rivals such as TikTok were eating into Facebook's growth. However, when the company released its fourth-quarter 2022 earnings report on Feb. 1, 2023, the stock exploded 23% higher, as investors were far more optimistic about its future.
What did CEO Mark Zuckerberg say during this year's earnings call that made many investors take a renewed interest in the stock? And, more importantly, should you invest today?
Let's take a look.
A newfound focus on efficiency
During the company's first 18 years, Zuckerberg had the pedal to the metal, pushing for growth to build a dominant social media market share. As a result, it made little business sense to press for more efficiency and maximum profitability. However, its Facebook and Instagram business is now beginning to slow and mature. As a result, Zuckerberg realized it was time to change the company from a "growth at all costs" focus to one of profitable growth, requiring it to operate more efficiently.
Although Zuckerberg declared 2023 the "year of efficiency," the company's work on operating more efficiently began last year when it started restructuring operational teams, eliminating or lowering funding for areas with low investment returns, and removing layers of middle management. As a result, the company laid off 11,000 employees, 13% of its workforce, in November 2022, and management plans to cut more workers in 2023. Additional cost-saving activities include consolidating office facilities and modernizing future data centers with a new cost-efficient architecture.
Should management prove successful in its efficiency initiatives, it will result in lower capital expenditures and operational expenses. Lower operational spending means more profits, and fewer capital expenditures result in more free cash flow. Wall Street loved this news, a prime reason sentiment shifted to positive on the stock after fourth-quarter earnings.
Membership growth and greater engagement
This time last year, shareholders were agonizing over Facebook's daily active users (DAUs) declining sequentially for the first time in the company's history.
Image source: Meta Platforms.
As a result, sentiment toward the company were decidedly negative in 2022, as people began blaming the loss of subscribers on Facebook losing relevance with millennials and Gen Z. However, this year's fourth-quarter earnings release showed sequential DAU growth returning, and the first time that number exceeded 2 billion. Additionally, Facebook's DAU/MAU engagement number increased to 67.5, over a percentage point from where it was in the fourth quarter of 2021. Many analysts regard the DAU/MAU number as a sign of the "stickiness" of a platform and any number above 60 as top-of-the-line.
This year the talk of Facebook losing relevance has died down.
Improving ad monetization across the platform
During this macroeconomic-induced ad market downturn, Meta is increasing its monetization of all its ad platforms, which should juice its results once the ad market rebounds.
The first area the company has focused on monetizing is Reels -- that's important since the short-form video product is helping Meta regain relevance with younger generations. Today, Reels monetizes at a lower rate than its other social media products like Feed and Stories, but management is on track to grow Reels profitably by early 2024.
The second area management plans to improve is the monetization of its ad business outside of Reels by using artificial intelligence. So far, its efforts are working. For example, in the fourth quarter of 2022, advertisers gained over 20% more ad conversions than in the year before. An ad conversion is when users perform an action, buy a product, download software, make a phone call, etc., after interacting with an ad. And considering that cost per acquisition, the total cost of a customer completing a specific action, has been declining, it has resulted in higher returns on advertising spend for customers. So naturally, higher returns make advertising on Meta's apps far more attractive -- that's excellent for the business long term.
Should you buy the stock?
The Federal Reserve could raise rates to 5% to 5.25% from the current 4.5% to 4.75%, suggesting at least two more 0.25% hikes.
The Fed also projects interest rates declining in 2024 and 2025. Suppose that is true; the worst part of this downturn could be over for the economy and digital ad market. Additionally, the ad market is ripe for a rebound over the next two years as interest rates decline. In that case, Meta is one of the best-positioned ad platforms for the upcoming digital advertising rebound. Therefore, investors should consider putting this stock on their buy list to supercharge their returns over the next several years.
