Meta Platforms' (META 1.74%) stock popped 7% during after-hours trading on July 26 in response to the social media giant's second-quarter results. Its revenue rose 11% year over year to $32 billion and beat analysts' estimates by $970 million. Its EPS grew 21% to $2.98 and also cleared the consensus forecast by $0.07.
Meta's earnings beat was impressive, but does its stock still have room to run after its year-to-date gain of more than 150%? Let's review Meta's previous challenges, its recent recovery, and its valuations to see if it's worth buying.
Image source: Meta Platforms.
Why did the bulls abandon Meta last year?
Last November, three big challenges caused Meta's stock to drop to a seven-year low. First, its core advertising business (which generated 97% of its revenues in 2022) stalled out as it grappled with macro headwinds for digital ads, competition from ByteDance's TikTok and Apple's privacy changes on iOS. Meta's revenue declined 1% in 2022, compared to its 37% growth in 2021, and many investors were convinced its high-growth days were over.
Second, Meta's operating margin plunged from 40% in 2021 to 25% in 2022 as it expanded the unprofitable Reality Labs division, which houses its virtual reality and augmented reality devices. That segment racked up an operating loss of $13.7 billion in 2022 (compared to Meta's total operating income of $28.9 billion), while only generating $2.2 billion in revenues. Even as Meta cut costs with mass layoffs, it continued to expand Reality Labs.
Lastly, rising interest rates caused many investors to dump their tech stocks -- and Meta's decelerating growth made it an easy target for the bears.
Has Meta resolved those issues?
Meta's advertising revenues declined year over year for three consecutive quarters before finally rising 4% in the first quarter of 2023. In the second quarter, its ad revenue rose 12% year over year (and 12% sequentially) to $31.5 billion -- which counters the bearish argument that Meta's advertising business is collapsing.
|
Metric |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
|---|---|---|---|---|---|
|
Meta ad revenue (in billions) |
$28.2 |
$27.2 |
$32.2 |
$28.1 |
$31.5 |
|
Growth (YOY) |
(2%) |
(4%) |
(4%) |
4% |
12% |
Data source: Meta Platforms. YOY = Year-over-year.
Just as it did in the first quarter, Meta attributed that acceleration to big ad purchases from Chinese cross-border marketplaces, which were looking to reach overseas buyers. Meta didn't name any of those online marketplaces, but they likely included Pinduoduo's Temu, Alibaba's AliExpress, and Shein.
Meta's total number of ad impressions across all its platforms rose 34% year over year in the second quarter, which offset a 16% decline in its average price per ad. That dynamic was similar to the first quarter, when its 26% increase in total ad impressions offset its 17% decline in average ad prices.
Meta is serving up more ads because its audience is still expanding. Its Family of Apps (Facebook, Messenger, Instagram, and WhatsApp) served 3.88 billion monthly active users during the quarter, representing 6% growth from a year earlier. Within that total, Facebook's monthly active users rose 3% to 3.03 billion.
That stable growth indicates Meta will remain one of the top advertising ecosystems for the foreseeable future -- even as TikTok and other platforms try to pull away its younger users. Meta noted that Reels, its short-video answer to TikTok, was already generating an annual revenue run rate of over $10 billion -- compared to just $3 billion last fall.
CEO Mark Zuckerberg also said he was "optimistic" regarding the future of Threads, its recently launched Twitter-like platform, which attracted nearly 100 million users in its first three days, but admitted there was still a "lot of basic work to do."
As for Apple's platform changes, Meta has been offsetting that pressure with new AI-driven ad recommendations for its News Feed ads. Zuckerberg claims those changes have already driven a "7% increase in overall time spent on the platform."
However, its Reality Labs revenue declined 39% year over year to $276 million, as it sold fewer Quest 2 headsets (ahead of the Quest 3's planned launch in late 2023), while its operating loss widened from $2.8 billion to $3.7 billion.
On the bright side, Meta's total operating margin held steady year over year at 29%, as its cost-cutting measures and the recovery of its higher-margin advertising business offset the Reality Lab's losses. It also lowered its full-year capital expenditures forecast from $30 billion to $33 billion to $27 billion to $30 billion, citing its recent savings on non-AI servers, postponed projects, and delayed deliveries -- but noted those costs would rise again in 2024.
The valuations and verdict
Meta expects its revenue to rise 15% to 24% year over year in the third quarter, which strongly suggests its cyclical downturn is over. It also indicates that analysts' expectations for its revenue and earnings to rise 9% and 39%, respectively, for the full year might be too conservative. Based on those estimates, Meta's stock looks reasonably valued at 25 times this year's earnings -- so it isn't too late to buy more shares of this resilient FAANG stock.
