Shares of Meta Platforms (META -0.10%) stock have already more than doubled in 2023, but it's not too late for investors to buy the stock.
There are a number of catalysts that could continue to push Meta shares higher long term despite the strong run in the stock price recently. After a rough 2022, Meta looks poised to accelerate revenue growth and improve profits.
Here are three reasons investors should consider adding shares of Meta to their portfolio.
1. The year of efficiency will reset operating expenses
Meta has lowered its outlook for 2023 expenses by about $9 billion at the midpoint of its guidance. That not only creates a lot of room for increased profitability but resets its operating expenses for future years as well.
To put that guidance in perspective, Meta generated about $29 billion in operating income in 2022. It spent nearly $88 billion on operating expenses for the year.
Management's latest outlook calls for about $88 billion in operating expenses again in 2023, but Meta's starting to grow revenue again. It grew the top line 3% in the first quarter, and management guided for about 7% revenue growth in the second quarter. That should produce strong leverage for Meta's bottom line.
It's worth noting the company still expects Reality Labs to produce an increased operating loss in 2023. In 2024 and beyond, it's going to manage operating expenses to show an improved operating margin for the metaverse business.
By holding operating expenses steady in 2023, Meta is making up for the year of flat revenue it experienced in 2022. Going forward, it should be able to continue on a path toward improved operating margins for the entire business instead of resetting closer to the massive drop in operating efficiency the company saw in 2022.
2. Reels monetization continues to improve
While Reels has added a lot of engagement on Instagram and Facebook, it remains a drag on overall monetization.
Meta still doesn't monetize time spent on Reels at the same level as time spent on its Feed or Stories products. However, management expects the overall impact of Reels on monetization to be net neutral by the end of the year. That means the increase in time spent will fully offset the lower monetization rate for Reels. That's an effort the company began in earnest at the start of the year.
And it's making good progress. Reels ad load increased 17% last quarter, accelerating from 16% in Q1, according to tracking data from Citi analysts. Not only are ad loads increasing, Meta's continuously improving its artificial intelligence capabilities, producing better recommendations and performance tracking for advertisers. Those innovations help increase the value of Reels ads while drawing in new advertisers to the format.
In 2024 and beyond, Reels should be additive to the overall advertising business as Meta brings monetization levels up to par with Feed and Stories.
3. The secular trends favor Meta once again
Advertisers pulled back on spending in 2022 amid economic uncertainty. On top of that, digital advertisers like Meta were hit by changes preventing user tracking across apps in Apple's iOS. As such, Meta experienced its first-ever revenue decline last year.
But we've now lapped the impact of Apple's changes, and marketers are starting to increase spending on digital advertising again. Both April and May saw marketers increase spending on digital advertising year over year, according to Standard Media Index. That follows consistent declines in each of the past two quarters.
That bodes well for Meta and leaves open the possibility the company outperforms revenue expectations in Q2. Moreover, it should be back on track for strong revenue growth for years to come as digital continues to take a bigger share of ad spending from traditional media.
Combined with improved monetization on Reels and reset operating expenses, Meta's profit potential is looking just as strong as ever. Despite the run in the stock, shares are trading at an enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) ratio below 20. With the strong potential for meaningful revenue growth and significant operating-margin expansion in 2024, that looks like a fair price to pay for shares today.
