Meta (META -0.59%) -- that is to say, Facebook and Instagram -- went all in on the metaverse when it announced the change to its corporate name in late 2021. That strategic pivot backfired in 2022, though. With digital ads (still far and away the company's only revenue stream that matters) taking a hit this past year, the market turned its magnifying glass on profit margins and didn't like what it found. Meta has been spending far too aggressively on a business model that won't pay off for many years.
CEO Mark Zuckerberg has thus billed 2023 as the "year of efficiency" as the company gets back to focusing on its social media app bread-and-butter. The next growth pillar for Meta won't be the metaverse after all but instead could be none other than WhatsApp.
The long forgotten leader in messaging
Meta announced its acquisition of internet-based messaging service WhatsApp all the way back in 2014 for nearly $22 billion (higher than the original offer of $16 billion given that part of the deal was paid for in Facebook stock, which rose in value by the time the deal was closed and equity awards paid out).
From a total user perspective, Meta's purchase nearly nine years ago has paid off in spades. At the time the acquisition was announced, WhatsApp had in the ballpark of over 400 million monthly average users. Today, WhatsApp has over 2.2 billion users.
But from a revenue perspective, WhatsApp has received little attention. It's not precisely known how much money WhatsApp has generated, but it hasn't been much. The company makes money from its WhatsApp Business users, which pay on a per-message basis once they've surpassed 1,000 conversations a month. Revenue generated from this service is lumped into Meta's "other" line item, which was reported at $808 million in sales in 2022. That was a healthy 12% increase but an almost insignificant sum compared to the nearly $114 billion in revenue from advertising -- primarily on Facebook and Instagram.
What's the WhatsApp appeal?
Simple person-to-person and person-to-business messaging may sound so elementary, especially when all the talk has been about a 3D rendering of apps on the internet dubbed "the metaverse." But that 3D future is a long way off. It's basic messaging that's all the rage right now. In a mobile world (especially in developing markets), messaging is more convenient than email. People are easily accessible via this mode of communication, and it's cheap and easy for businesses to operate a customer-facing profile on WhatsApp.
The free-to-use nature of WhatsApp for individuals is what has turned it into a messaging powerhouse, and those more than two-billion monthly users are now what has businesses (especially small businesses and merchants, again in emerging markets) flocking to WhatsApp. And in true Meta fashion, it's advertising that's beginning to unlock the value of the WhatsApp platform.
Meta has begun using services called "click-to-messaging" ads using WhatsApp, an ad link that takes a user directly to a conversation with a business when clicked on. In the Q3 2022 earnings call, this click-to-message ad revenue on WhatsApp was on pace for a $1.5 billion per-year rate, an 80% increase over the year prior. On the Q4 2022 earnings call, Zuckerberg said the entire click-to-message ad business (which also includes Facebook and Instagram messaging) was on pace for $10 billion a year.
An example of a WhatsApp physical business ad with a QR code that takes a customer directly to a conversation with the business. Image source: Author.
WhatsApp will be a key pillar in this newer ad service, as it's only just beginning to onboard larger businesses onto this service. Zuckerberg mentioned AirFrance on the last earnings call as an example, which is now using WhatsApp to message passengers their boarding passes and flight updates. WhatsApp messages apparently have far higher engagement rates than other messaging mediums like email. Other businesses might take a hint as well if WhatsApp increases engagement with customers.
Meta's overall revenue fell 1% in 2022, but there are green shoots emerging that could help the business return to expansion in 2023. One of those key business lines may very well be WhatsApp, not the metaverse virtual reality (VR) business. Paired with Meta's promise to get expenses back in check, it's no wonder investors are warming up to Meta stock again. After a monster rally so far in 2023, shares now trade for 21 times trailing-12-month earnings per share, or 25 times free cash flow -- not the extreme value of just a couple of months ago but perhaps a fair value if Meta can reignite its growth engine once again.
