To say Meta Platforms (META 0.43%) had a great start to the year may be an understatement, but the second half of 2023 could be even better.
Meta surprised investors with its outlook for the second half of 2023. It expects third-quarter revenue between $32 billion and $34.5 billion, well above Wall Street's expectations. Management lowered its 2023 capital expenditure forecast by $3 billion to between $27 billion and $30 billion.
The numbers look great, and investors have even more reason to be optimistic. Meta's investments are showing strong progress in increased engagement and monetization.
Meta is seeing reaccelerating growth
Meta's top line grew 11% year over year in the second quarter, and its outlook calls for 20% year-over-year growth at the midpoint. Revenue declined in the back half of 2022, setting Meta up for some easier comparable quarters this year. But even when you compare the outlook to the third quarter of 2021, it's growing over 14% on a two-year basis next quarter.
Importantly, Meta is showing operating leverage. Its operating margin on the Family of Apps business improved by 2 percentage points in the second quarter, helping offset pressure from the money-losing Reality Labs business.
Fueling the reacceleration and operating leverage is a recovery in the advertising market. Additionally, foreign exchange rates will become a tailwind instead of a headwind later this year. But Meta is showing strength well beyond the secular trend. And that's due to the investments it's made over the last few years to improve engagement and monetization.
The big AI investments are paying off
Many investors felt Meta was spending too much in capital expenditures as it focused on artificial intelligence capabilities to power its apps.
The company applied its machine learning artificial intelligence (AI) to several parts of the app, most notably recommended posts in its Feed and Reels formats. The introduction of AI-recommended content drove a 7% increase in overall time spent on the platform. What's more, the same AI recommendation algorithm can be used to target ads for users, ensuring they see the ad most likely to capture their attention at any given moment.
The increase in engagement and improved ad targeting is evident in Meta's average revenue per user (ARPU) numbers. Simply compare its decline and recovery with Snap (SNAP 27.63%), which operates in the same industry.
| Metric (change is YOY) | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 |
|---|---|---|---|---|---|
| Meta global ARPU change | (3%) | (6%) | (6%) | 1% | 8% |
| Snap global ARPU change | (4%) | (11%) | (15%) | (19%) | (16%) |
| Meta U.S. & Canada ARPU change | (5%) | (6%) | (3%) | 1% | 7% |
| Snap North America ARPU change | 8% | (1%) | (9%) | (18%) | (14%) |
Data source: Meta and Snap. Calculations by author. ARPU = Average revenue per user. YOY = year over year.
As you can see, Meta managed to keep its ARPU decline relatively tame, and it recovered quickly. Comparatively, Snap has seen its ARPU decline for five straight quarters, including four straight quarters in North America where foreign exchange has less of an impact.
More growth drivers coming
Investors have a lot to be optimistic about over the next few months as well.
Meta demonstrated continued improvement in Reels monetization. The introduction of Reels cannibalized time spent on products like Feed and Stories, but Meta didn't monetize that time spent at the same level. It expects to reach parity by the end of the year and should show improved monetization levels in 2024.
Additionally, it's developing generative AI advertising tools. Its Advantage+ AI-assisted tools have already helped marketers improve their return on ad spend. As Meta develops more features, it should be able to increase the value of ad spend by reducing the cost of creatives and improving conversion rates.
Finally, there's the launch of the Meta Quest 3, its next consumer VR headset. The Quest 3 is a significant upgrade from the previous generation, which was released three years ago. It could be another source of revenue in the fourth quarter.
With a lot of factors working in its favor, Meta should show very strong revenue growth in the back half of the year with continued improvements in its operating margin. Despite the stellar growth in its stock price during the first half of 2023, there could be more room to run for Meta stock.
