Meta Platforms (META -10.56%) showed strong progress in the first quarter, but there may be even better results still to come.
After three consecutive quarters of revenue declines, the social network company produced positive growth in the first quarter. The past revenue declines are the result of several forces: a macroeconomic slowdown, changes in Apple's privacy policy impacting ad measurement, and the growth of TikTok competitor Reels, which cannibalizes other parts of its app.
Meta is investing heavily in artificial intelligence (AI) to overcome the forces within its control, and its first-quarter results indicate it's turning the corner. As those AI investments bear fruit, Meta's revenue growth should accelerate throughout the year.
How AI is transforming Facebook and Instagram
Meta uses the same AI model to determine what you see in your feeds, the next reel that pops up as you swipe, and what ads you see. And all three of those showed improvements in the first quarter.
Meta said 20% of the content users see on Facebook and Instagram is surfaced by algorithmic recommendations. On Instagram, where Reels is most popular, 40% of content users see on the platform is chosen by AI. Better content recommendations mean better engagement from users. The company says improvements in the recommendation algorithm have driven a 24% increase in total time spent on Instagram since it launched Reels.
Since Facebook and Instagram advertisements take the same or similar formats as its user-generated content, it can apply a similar algorithm for showing users ads. The AI is basically solving for what piece of content will produce the most value if shown next: a piece of content from a person they follow, an algorithmically surfaced piece of content, or an advertisement. Better ad recommendations mean more clicks and higher ad prices.
Meta is also applying AI to improve measurement capabilities. After Apple made it harder to track users across apps, Meta could no longer directly track whether an ad converted into a sale, download, or whatever goal the marketer aimed to achieve. It's now relying more on AI to determine the probability of conversion for ad clicks. Understanding which ads convert and which don't is essential for a marketer to determine the value of an advertisement and improve their campaigns, driving higher average ad prices over time.
The last area of its current AI implementation is in Meta's Advantage+ service, which helps marketers develop ad campaigns. Meta says revenue from its AI-assisted advertising service increased sevenfold in the last six months.
Revenue is about to accelerate
Meta hit a turning point with Reels at the end of 2022, and it is poised to lead to a big acceleration in revenue in 2023 and 2024.
Reels is additive to engagement overall (see the above comment about the 24% increase in time spent on Instagram since its launch). However, it cannibalizes the feed and Stories. Those two mature products can monetize time spent at a much higher rate than Reels. But Meta made the decision to focus more on Reels monetization starting this year, and it expects Reels to become revenue-neutral later this year or by early 2024 at the latest.
In other words, each minute spent with Reels is becoming increasingly valuable now. And Meta's leaning heavily on AI to make that happen.
The aforementioned recommendation algorithm was built with Reels in mind. And the improvements have shown up in the strong performance of Reels in driving higher engagement. That suggests its ad recommendations in the format can be just as good, especially as it drives more marketers to make ad creatives for the format.
It's already showing good results. Reels monetization improved 30% sequentially on Instagram and 40% on Facebook.
Earnings will come behind it
Meta is spending a lot of money right now to build the data centers it needs to run its artificial intelligence, but that won't always be the case.
CFO Susan Li said the company will continue to spend heavily on building data centers to power its artificial intelligence efforts for the near future. That means the immediate revenue growth might not translate into significant profit growth for the next couple of years.
But investors should understand that once Meta has built its data centers, it costs much less to maintain and upgrade them. What's more, the facilities represent a sustainable competitive advantage over smaller digital advertising companies relying on cloud computing providers. Not only will Meta leverage the fixed cost of the data centers, but it'll also have a custom-built solution while its competitors use computers from a public cloud provider.
Meta's AI investments may be dragging down earnings for now, but the signs of revenue growth are clear. The long-term outlook for the company should give investors a lot of confidence in the stock.
