Share prices of social media king Meta Platforms (META -0.68%) are finally getting their pullback after an epic year -- down nearly 15% from their most recent highs, but still up an incredible 140% in 2023 as of this writing. The reason is a bit confusing because Meta handily beat all financial expectations for the third quarter of 2023. Some of that beat is attributed to a partial return to operating profit margins that Meta was known for.
As CEO Mark Zuckerberg's "year of efficiency" comes to a close, investors are now wondering if the profit margin expansion story can continue into 2024. Some are also wondering if this recent price drop is an opportunity to buy Meta on the dip. Let's see if the answers present themselves.
Meta's AI productivity boost is real
In recent months, Meta showed off new artificial intelligence (AI)-powered creation tools for its app users ahead of the launch of the Quest 3 VR headset. But the story of 2023 is more about what's going on behind the scenes. AI is being infused across Meta's services to make ads more efficient for advertisers and to drive engagement with these ads from the big Facebook, Instagram, and WhatsApp user base.
Up until this most recent quarter, revenue growth from these changes remained muted due to ongoing economic worries (ad budgets tend to get slashed first when recession fears send businesses into cash conservation mode). But Q3 saw the changes finally get a chance to have an effect. Revenue soared year over year as Meta saw a robust rebound in the digital advertising market.
| Full-Year 2022 | Q1 2023 | Q2 2023 | Q3 2023 | |
|---|---|---|---|---|
| Revenue | $116.6 billion | $28.6 billion | $32 billion | $34.1 billion |
| Change (YOY) | (1%) | 3% | 11% | 23% |
Data source: Meta Platforms.
An even more dramatic uptick came in earnings per share (EPS), which soared 168% higher year-over-year in Q3. This can be partly attributed to staffing cuts initiated as part of the "year of efficiency," but it's also related to Meta managing a big rebound in operating profit margin (again, thanks AI) as well as some ongoing stock repurchases ($13.8 billion worth through the first nine months of 2023).
Data by YCharts.
Why the glum mood on Wall Street?
As has seemingly become the norm for Meta investors, a litany of other issues overshadowed the company's triumphant earnings update. Share prices have been down recently over concerns about war in the Middle East, ongoing global economic concerns from rising interest rates, and a new lawsuit involving 41 U.S. states alleging Meta intentionally designed its Instagram and Facebook social media apps with features it knew were harmful to younger users (affecting their mental health).
Meta's own outlook for Q4 also didn't help the stock price. The company cited a potential impact on its revenue during the final months of 2023 related to economic disruption due to armed conflict as well as ongoing regulatory scrutiny. Meta's guidance calls for Q4 revenue in a range of $36.5 billion to $40 billion, implying year-over-year growth of "only" 13% to 24%.
Investors may also have noted the expected capital expenditure (or CapEx, spending on property and equipment) outlook for 2024. CapEx for all of 2023 is now expected to be in a range of $27 billion to $29 billion, but jump to $30 billion to $35 billion in 2024. Much of that increase will be for data center infrastructure, including AI servers (like from longtime supplier Nvidia). Some investors may be worried that Zuckerberg's 2023 "year of efficiency" was a one-off.
Meta signals a permanent shift in thinking
I'm of the mind that Meta's new operating standard established this year is here to stay. Zuckerberg said so. Early in the Q3 earnings call, Zuckerberg stated:
I've been happy with our results this year so far, and we're planning to continue focusing on operating efficiently going forward -- both because it creates a more disciplined and lean culture, and also because it provides stability to see our long term initiatives through in a very volatile world.
Of course, there is still the perceived excess related to Meta investing in the metaverse segment Reality Labs (which is supporting the aforementioned launch of the Quest 3 headset). Reality Labs reported operating losses of $11.5 billion through the first nine months of 2023 on sales of just $825 million. Management said to expect losses from this segment to rise even further in 2024.
Building a new computing platform is really expensive. Meta is open enough to reveal just how expensive, but this ugly segment loss still gets a significant portion of investors irritated. Perhaps AI will eventually help streamline Reality Labs too, but this will take years to develop.
While it's still too soon to predict how 2024 will shape up for Meta, I like the company's new focus on driving operating profit efficiencies in its core business. Shares now trade for about 21 times expected full-year 2023 EPS estimates, and about 17 times Wall Street's expectations for 2024. If those valuations are satisfactory, Meta looks like an intriguing value again, especially given this last earnings update and the recent stock price pullback.
