Meta Platforms (META 0.11%) has yet to return to its highly profitable ways, but that could be about to change.
After a severe downturn in earnings last year, Meta's tracking right in line with its 2022 results through the first six months of 2023. And while investors have reason to expect strong growth in the back half of the year, 2024 could be even better.
There are three big reasons Meta will see its profit growth accelerate in 2024: Reels, messaging, and artificial intelligence (AI).
1. Getting to revenue neutral on Reels
Reels has been a headwind for Meta's revenue growth over the last few years, but it expects to get to neutral by the end of 2023.
Users scroll more slowly through Reels than they do the Newsfeed or Stories. That means fewer ad impressions. So even as time spent on the platform has increased, the revenue potential has actually decreased. Revenue neutrality would be when the rise in engagement cancels out the lower monetization rate.
There are two levers Meta's pulling on Reels: boosting engagement, and increasing revenue per minute of engagement. Both are going well.
Meta said users played over 200 billion Reels per day across Facebook and Instagram in July. That's up from about 90 billion 15 months prior and 140 billion in October of last year.
Reels' annual run rate topped $10 billion in the second quarter, up from $1 billion in Q2 2022. That means revenue per Reels play has jumped around four- or fivefold over the past year.
2. Building momentum in messaging
Messaging remains an area with strong engagement among businesses and consumers, but with limited monetization so far.
Last year, Meta CEO Mark Zuckerberg said WhatsApp and Messenger will be the next major growth pillar for the company. So far, he's delivering on that promise, with a lot more potential to come.
Click-to-message ads on Facebook and Instagram are already a $10 billion business, crossing that threshold in the fourth quarter of last year. Click-to-WhatsApp, in particular, grew revenue 80% year over year in Q2.
Meanwhile, Meta continues to expand the utility of WhatsApp for Business, allowing companies to advertise on Facebook and Instagram with just a WhatsApp account. It also introduced Channels, which is a way for businesses (or anyone) to keep a group of users informed of important updates. The feature could drive more companies to connect with consumers on WhatsApp, increasing interest in click-to-message ads.
Paid messaging on WhatsApp is seeing strong growth, too. CFO Susan Li said the number of businesses using the feature doubled year over year in the second quarter. As more companies adopt paid messaging solutions, it could unlock a lot of value from the 2 billion-plus users on Meta's messaging apps.
3. Getting more out of its AI investments
Meta has spent billions of dollars building out its AI capabilities, and it's just starting to bear fruit.
Reels is powered by a machine learning AI, which produces better content recommendations. That same AI helps with ad targeting, improving ad prices for Meta. But, as mentioned, Reels has remained a drag on overall revenue growth due to the structural challenges of video.
Beyond Reels, though, Meta incorporates AI into lots of different ad products. Zuckerberg said almost every advertiser now uses at least one of its AI-driven products.
AI has the potential to decrease the cost of ad creatives on Facebook and Instagram. That will allow more businesses to use more of Meta's ad formats, increasing demand for its existing supply. AI can also help marketers find the exact right wording and images to convert users at the highest rate possible. That will increase the value of each ad impression. The combination should lead to higher average ad prices for Meta, all else being equal.
Meta has three big revenue growth drivers heading into 2024. Meanwhile, it should show good operating leverage, helping it outperform expectations. Shares currently trade around 18 times analysts' consensus 2024 earnings estimate. Even if Meta merely meets those expectations, it would make the stock relatively inexpensive to buy today.
