Meta Platforms (META 1.06%) is out of the doghouse. After losing close to $750 billion in market value last year, the stock has surged in 2023, jumping on its fourth-quarter earnings report after the company beat revenue and earnings estimates (adjusted for restructuring charges).
The company slashed guidance for total expenses from $94 billion-$100 billion to $89 billion-$95 billion, and its capital expenditures forecast from $34 billion-$37 billion to $30 billion-$33 billion. That newfound control over its expenses comes after it laid off 11,000 employees, reduced its office footprint, and implemented new, more cost-efficient data center architecture.
While the company deserves credit for its cost-cutting efforts, there are other changes it's making that could drive a boom in profits in 2023. Let's take a closer look.
Image source: Meta Platforms.
Reels is gaining scale
Lost in the discussion over the company's metaverse pivot and the stock's plunge last year is Meta's investment in Reels, its short-form video product designed to compete with TikTok, the viral social media app that has more than 1 billion users around the world.
Meta's profitability has fallen in recent quarters in part because of its buildout of Reels. The product has monetized at a lower rate than News Feed and Stories. The company was willing to make that trade-off in order to stave off the competitive threat from TikTok, but it now seems like it's reached a crucial turning point with Reels.
CFO Susan Li said on the recent earnings call: "We are still roughly on track to bring the overall Reels revenue headwind to a neutral place by the end of this year or early next year, and we're planning to do that through both improving Reels monetization efficiency and growing incremental engagement from Reels."
In the fourth quarter, ad impressions rose 23% but the price per ad fell 22%, in part due to lower-monetizing surfaces like Reels. The improvement in its Reels monetization should help the company close that gap and give profit growth a tailwind this year.
ATT headwinds are fading
In 2021, Apple changed its rules around ad targeting and tracking, restricting tracking tools on iOS that were commonly used by companies like Meta. This move resulted in a significant deceleration in Meta's revenue growth, as you can see in the chart below.
META Revenue (Quarterly YoY Growth) data by YCharts
Apple's ad tracking transparency (ATT) initiatives largely took effect in the third quarter of 2021, and as the chart shows, Meta's revenue growth quickly decelerated after that. Though other factors have had an effect, like competition from TikTok, macro challenges, and difficult comparisons with prior-year growth, Apple's rule change was a significant headwind.
The good news is that the worst of the effect has rolled off, and removing that headwind could help Meta return to profit growth in 2023. Li acknowledged that ATT still represented an absolute headwind to revenue, but the company has made progress in mitigating the effect of the change.
NASDAQ: META
Key Data Points
A commitment to efficiency
CEO Mark Zuckerberg has promised to drive overall growth in operating income, starting in 2024, as Meta manages its spending on Reality Labs and sees its advertising business to return to growth.
However, that strategic shift could start to bear fruit this year, especially if macroeconomic headwinds fade. The Meta chief seems committed to returning the company to profitable growth, saying: "We're going to be more proactive about cutting projects that aren't performing or may no longer be as crucial, but my main focus is on increasing the efficiency of how we execute our top priorities."
Currency fluctuations are outside of the company's control, but foreign exchange comparisons are likely to get easier in the second half of the year. The company will be lapping a surge in the value of the dollar, which could also be a tailwind on the bottom line.
Analysts currently expect earnings per share to rise 10.5% in 2023 to $9.50, but the profit tailwinds and the billions of dollars in slashed expenses could lead to much better bottom-line results this year. If the company can make that a reality, the stock could have a lot of upside ahead.
