After hitting a low of $88 in November last year, Meta Platform's (META -0.65%) stock has made a remarkable 238% comeback, trading around $298 a share these days.
Given how pessimistic Wall Street was about the stock less than a year ago when Meta reported its first-ever annual revenue decline (for 2022), the swift recovery has been striking. Investors' mood toward the stock has altogether changed and some suggest that the worst is probably over for the social media giant.
But is that so? Let's explore Meta's recent performance to see if an answer presents itself.
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A solid improvement in Meta's quarterly performance
Meta faced some unprecedented challenges in 2022 when it reported that revenue declined 4% year over year in the fourth quarter and 1% for the whole year. Investors were very disappointed and made their displeasure clear. Management responded with some immediate changes that helped ensure the situation would be temporary.
So far, Meta's recovery has been better than expected. After reporting a 3% year-over-year increase in revenue in the first quarter of 2023, Meta managed to grow revenue by 11% year over year in Q2 and beat the higher end of its guidance. Net income performed even better, up 16% year over year, thanks to cost-cutting measures.
Aside from spending cuts, it helped that engagement levels improved as the family daily active people (DAP) metric rose 7% to 3.07 billion while Facebook's daily active users (DAU) rose 5% to 2.06 billion. In other words, the recovery was broad-based, both financially and operationally.
Meta's metaverse remains a massive cash burner
Meta did well to turn around its financials. Still, investors should monitor the company's performance in the next few quarters. It will take more proof of sustainable growth to declare the changes a true win. Part of the reason for that is that one of investors' biggest concerns about Meta is its continued heavy bet on the metaverse.
While it's not unreasonable for Meta's management to be excited about the potential of this emerging industry -- analysts at JPMorgan Chase estimate this industry will eventually be worth a trillion dollars annually -- there are plenty of uncertainties around these promises.
For instance, we are still unclear when the metaverse will reach the mainstream or what business model is best suited for this sector. Besides, the sector still has to solve complex regulatory and ecosystem issues in the coming years. It will take plenty of partnerships, talents, billions of dollars of investments, and many years (if not decades) before we have more clarity on the real prospects of this industry.
In the meantime, however, Meta has to pay the bills for its massive research and development and marketing costs. For instance, quarterly operating losses for this segment of the business jumped from $2.8 billion to $3.7 billion year over year. Yet, Q2 revenue fell by 39% year over year to $276 million. No wonder investors are worried!
It is unlikely that Meta will slow down its investments in the metaverse. If anything, we can see that it has doubled down on its investments, resulting in a 33% increase in its operating losses. Like it or not, investors can only be hopeful that the metaverse project will succeed in the long run.
What all this means for Meta Platforms investors
Meta's latest results give investors hope that the worst is over, thanks to the solid improvements on the top and the bottom line. While it's probably still in the early days of recovery, Meta's advertising business has likely reached the bottom of the cycle it's in. And management offered guidance suggesting total revenue will be $32 billion to $34.5 billion in the current quarter. The lower end of that guidance would be a 16% jump from Q3 2022.
Still, the ongoing metaverse investment continues to eat into the returning profits Meta is seeing from advertising. It's still unclear whether the metaverse investment will create shareholder value over the long term. What is clear is that it's creating investor heartburn in the short term.
