You gotta give credit where it's due, and Meta Platforms (META 1.74%) deserves some for its third-quarter earnings report. The social media giant delivered a remarkable turnaround from a year ago when the stock plunged over concerns about flatlining growth and widening losses from its Reality Labs division. Since 2022's Q3 report, the stock has tripled in value as the business rapidly recovered. The growth and margins it's posting resemble the pre-pandemic Facebook.
Revenue in the quarter jumped 23% year over year to $34.1 billion, ahead of the consensus at $33.5 billion, while its operating margin doubled from the quarter a year ago, going from 20% to 40%, and earnings per share surged from $1.64 to $4.39, well ahead of the consensus at $3.70.
After several quarters of weak results, Meta's advertising business sprung back to life with 31% year-over-year growth in ad impressions even as the price per ad fell 6% year over year due to a shift to lower-monetizing geographies and formats.
Meta Platforms CEO Mark Zuckerberg. Image source: Meta Platforms.
Management credited some of the improvement to Reels, its short-form video product, for driving a 40%-plus increase in time spent on Instagram, and said that Reels was now net neutral to the company's ad revenue as it had earlier taken share from higher-monetizing ad products.
The company also said that the e-commerce segment was the biggest source of growth, including from advertisers in China aiming to reach customers in other markets. Fourth-quarter guidance was strong as well, calling for overall revenue of $36.5 billion-$40 billion, up 19% from a year ago at the midpoint.
Meta's growth rate was well ahead of competing digital advertising platforms like Alphabet and Snap, but there's actually a better reason to buy the stock than the strong numbers.
Meta rises to the challenge
A year ago, Meta faced serious doubts about its path forward as a company. Investors questioned the company's pivot to the metaverse, and it was unclear if its slowing ad growth was just a cyclical issue or something more structural.
Since then, CEO Mark Zuckerberg responded to investor concerns about shrinking profitability and the potential boondoggle in the metaverse. The company initiated an aggressive cost-cutting campaign, including multiple rounds of layoffs and a reduction in real estate that eliminated billions of dollars in expenses. Meta's employee headcount year-over-year fell 24% to 66,185, accounting for much of the improvement in profitability.
This isn't the first time Zuckerberg and his company have risen to meet such challenges and overcome those setbacks.
When the company first went public back in 2012, its stock price fell roughly 50% on concerns that smartphones and their smaller screens would sap the company's advertising growth. Facebook adjusted its ad products and it soon enough saw enormous growth from its mobile segment.
Similarly, the stock price fell roughly 40% in the aftermath of the Cambridge Analytica data-sharing scandal in 2018. In response, the company adjusted its privacy controls, giving users more control over the data the company has and who it shares that data with. Meta eventually returned to user growth and the business repaired its reputation over time.
Meta controls its own destiny
Operating margins topping 40% are outstanding for any business, but Meta could be even more profitable if it wanted to be. The easiest way for it to do that would be for it to ditch its Reality Labs business, which lost $3.7 billion in the third quarter.
That's not going to happen, and, in fact, Meta expects losses in Reality Labs to widen next year, but its ability to control those losses as well as the strong recovery and successful ramp-up of Reels is a reminder that Meta has much more control over its profitability than investors might think.
With the strong earnings beat, the stock trades at a price-to-earnings ratio of roughly 20 based on this year's forecast. That looks like a great price to pay for a business growing its revenue by 20% a year and one that could be even more profitable than it is right now. While the ad market remains volatile, Meta looks like a good bet to outperform as it builds on the momentum in the recent quarter.
