Meta Platforms (META -0.87%) wowed the market in its first-quarter earnings report. The stock jumped 14% as the Facebook parent topped estimates on the top and bottom lines after adjusting for a one-time restructuring charge related to its layoffs.
The company also lowered its full-year expense guidance and forecast a better-than-expected second quarter.
Altogether, the numbers portray a company finally turning the corner after multiple quarters of declining revenue and a wide array of challenges, including competition from TikTok, Apple's ad-tracking restrictions, and the company's own massive losses in the metaverse.
Meta stock has already rallied more than 150% from its lows last October, but it's not too late to capture the upside in the stock. Let's take a look at a few reasons why.
Image source: Meta Platforms.
The earnings recession is (mostly) over
After three straight quarters of declining revenue, Meta returned to revenue growth in the first quarter. The top-line increase was still modest at 3%, or 6% in constant currency, but the turnaround shows the company is headed in the right direction, and some of those headwinds above are starting to fade.
More importantly, the company has nearly returned to earnings growth, even as its losses in the metaverse continue to mount. Adjusting for a restructuring charge related to its most recent round of layoffs, adjusted earnings per share came in at $2.64, down slightly from $2.72 in the first quarter a year ago.
Based on its updated expense guidance and forecast for 5% revenue growth at the midpoint of its guidance, there's a good chance the company will return to earnings-per-share (EPS) growth in the second quarter of the year.
Meta is also benefiting from aggressive share buybacks, reducing shares outstanding by 5% over the last year. The company's focus on efficiency means headcount is now falling on a year-over-year basis as the company has reeled in spending in areas like sales and marketing, which declined by 8% in the quarter.
The user base continues to grow
For all the talk about Facebook and Instagram losing their primacy to TikTok or young people ditching Facebook, the numbers show that Facebook's properties continue to grow. Across its four main apps (Facebook, Instagram, Messenger, and WhatsApp), daily active users (DAUs) and monthly active users (MAUs) both rose 5% year over year to 3 billion and 3.8 billion, respectively, in the first quarter.
Even Facebook itself is still growing, reaching 2.99 billion MAUs and 2.04 billion DAUs, up 2% and 4%, respectively, and it's still adding users in mature markets like North America and Europe. It just reached 200 million DAUs in the U.S. and Canada.
Ultimately, user growth and engagement will drive the advertising business, which should recover once the economy returns to stable growth.
Monetization is improving
The major headwinds Meta has faced in monetization over the last year are due to Apple's ad-targeting restrictions and the company's investments in Reels to better compete with TikTok.
It's now lapped the impact of Apple's ad-tracking transparency rollout, meaning most of the negative comparisons are in the past. Management said it's seeing improving monetization with Reels and expects to reach parity with its other products by the end of the year.
Traditionally, when the company introduces new products on Facebook and Instagram, it prefers to build an audience first and then roll out ads. It's employed this strategy with Reels, and it seems to be paying off. Engagement is strong, with people resharing Reels more than two billion times a day, doubling over the last six months. Reels monetization efficiency is up 30% quarter-over-quarter on Instagram and 40% on Facebook in the same period.
Reality labs, the metaverse division, still seems destined to be a money pit for the foreseeable future. If Meta can control its spending there, the stock should be a winner, based on its momentum in its core advertising business.
Meta appears to be back on the right track, and profits could return to significant growth by the end of the year with the help of improved monetization, healthier ad demand, and a lower share count. There's still plenty of upside left for the top social media stock.
