2023 has been a good year to be invested in technology stocks, and one of the undisputed winners is none other than social media giant Meta Platforms (META +1.07%). For much of 2022, Meta distanced itself from its advertising roots, making hefty investments in new areas such as the metaverse.
What initially looked like an exciting new frontier for the company quickly went sideways. The company's expense profile became bloated thanks in large part to aggressive hiring and product development costs, ultimately taking a toll on profits. As a result, investors punished Meta stock, sending it down over 60% in 2022.
With his legacy on the line, the level of scrutiny on Meta CEO Mark Zuckerberg was beyond intense coming into 2023. Back in February, Zuckerberg declared 2023 would be Meta's year of efficiency, augmented by cost reductions in the form of layoffs while also pivoting revenue efforts back to advertising. Although this was encouraging to hear, executing on this vision was the more obvious challenge.
To put it bluntly, Zuckerberg has executed on these efforts nearly flawlessly, and investors have rewarded the stock. As of the time of this article, Meta stock is up 160% so far in 2023. And if the company's second-quarter earnings proved anything, it could be headed even higher.
NASDAQ: META
Key Data Points
Meta Platforms: Going from zero to one
One of the most famous investors in Silicon Valley is Peter Thiel. While Thiel may be best known as a co-founder of both PayPal and Palantir, perhaps his most impressive credential is that of an angel investor. Nearly two decades ago, Thiel reportedly made the first outside investment in Meta Platforms (then known as Facebook). This deal would net Thiel billions of dollars and cement him as one of Silicon Valley's most legendary personalities.
After years of success as an investor, Thiel wrote a book titled Zero to One: Notes on Startups, or How to Build the Future. Anecdotally, I read this book shortly after graduating from college and found the general premise quite interesting. Many founders may convince themselves that they have discovered something unique, but in reality, they are just building a potentially better mousetrap to an already existing problem. Thiel argues that in order to truly change the world and push forward into the future, entrepreneurs must build something completely new. In other words, going from zero to one.
When Facebook was created in the early 2000s, there were other social media websites. However, the sheer concept of social media was new, unique, and evolving. Zuckerberg outmaneuvered the competition, seemingly with ease, and has built one of the most successful technology behemoths in recent history. It's fairly safe to say he has gone from zero to one. Let's take a look at how he did that.
Don't sleep on Zuck
When analyzing Meta, it is important to understand that the company is much more than Facebook. Meta owns the photo and video-sharing application Instagram as well as messaging platform WhatsApp. Furthermore, the company has a growing gaming unit called Reality Labs which features augmented and virtual reality hardware and software. Zuckerberg has spent roughly two decades building an ecosystem that spans various products and services, all with one overlapping mission: to better help people connect.
Per the company's Q2 earnings report, Meta's daily active people (DAP) across its family of apps grew 7% year over year, reaching 3.1 billion. That's an eye-popping statistic considering there are roughly 8 billion people on the planet.
Given its commanding and growing reach, investors may not be surprised to learn that the company grew revenue 11% year over year to $32 billion for the quarter ended June 30. While 11% growth may not seem overwhelmingly impressive, it's important to keep in mind that inflation is still higher than historical averages, and the Federal Reserve continues to raise interest rates. The combination of these variables likely has some consumers watching their wallets.
What is really encouraging is that two of the company's fastest-growing segments were Europe and Asia-Pacific, which increased 13% and 10% year over year, respectively. Considering that Europe has been in a stagnant economy for the last several months, it is a good sign to see Meta's ability to accelerate growth in that region.
While top-line growth is nice to see, investors should keep an eye on profits. Meta reported earnings per share of $2.98, representing a 21% increase year over year and beating Wall Street expectations. Moreover, free cash flow for the quarter increased a whopping 146% year over year to $10.9 billion.
The return to strong revenue growth and sustained cash flow proves Zuckerberg's "year of efficiency" is coming to fruition. But with all of this positive momentum, investors need to be keenly aware of what the remainder of the year could have in store.
What does the second half have in store?
On the earnings call, management guided for third-quarter revenue to be in the range of $32 to $34.5 billion, which would represent 20% year-over-year growth at the midpoint. Arguably the more important component of management's guidance was on the expense side of the equation.
Meta's full-year 2023 expenses are now expected to be between $88 and $91 billion, an increase from the prior range of $86 to $90 billion. The reason for the change is due to a number of restructuring costs, including facilities consolidation and severance charges. Furthermore, while management did not provide specific figures for 2024, they did allude to rising capital expenditures related to initiatives in AI, the metaverse, and gaming. All of these projects have long-term roadmaps that likely will lead to cash outflows in the near and intermediate term.
For some investors, Meta's performance in 2022 may still linger in the back of their minds, so it's natural to be a little skittish about a rising expense profile next year. Nonetheless, Meta has demonstrated that it has the ability to generate strong profits and cash flow from its core anchor of advertising. Keep in mind that the company has over $53 billion of marketable securities and cash and equivalents on the balance sheet as well.
What investors should be wondering is if the company's investments in AI will pay off. Meta's Big Tech cohorts, such as Amazon, Microsoft, and Alphabet, are all investing aggressively in AI applications. And as a proxy, when it comes to comparable cohorts, Alphabet also saw its advertising business return to growth during the second quarter, specifically in Search and YouTube. During Alphabet's earnings call, it credited progress in AI applications as one reason it returned to growth.
While one company's success is not indicative of another's potential results, it's clear that the biggest names in tech believe that AI will be an important pillar of the next frontier of the internet. Investors should not discount the disruptive force that Zuckerberg has built over the last several years. The company appears to have turned a corner and is really kicking into gear. While the current financial results are impressive, there are too many factors to discount believing that Meta cannot regain its trillion-dollar crown.
