Meta Platforms (META) -) stock has been on a roller coaster ride. Founder and CEO Mark Zuckerberg's pivot to the metaverse cost it billions in expenses, while ad revenue got hamstrung by recessionary worry. As a result, Meta's stock collapsed from $384 in late 2021 to below $100 last fall. However, it's been a different story lately. Meta Platforms' shares have surged nearly 260% since last November's low.
The significant drop and pop likely have investors wondering what's next. Let's look at the company's second-quarter results for clues.
No. 1: Meta Platforms Second Quarter Financials Impress
Second quarter revenue grew 11% year-over-year to $32 billion while earnings increased by 21% to $2.98 per share. That was better than anticipated. The Street was looking for nearly $1 billion less on the top line and EPS of $2.91.
Operating income totaled $9.4 billion, and operating margin remained 29%. Net income ticked up 16% to $7.8 billion.
The strong performance is expected to continue given management upped third-quarter revenue guidance above $32 billion, nicely higher than Wall Street analysts' $31.1 billion forecast.
No. 2: Meta Platforms Ad Performance Was Solid, But Price Was a Headwind
Meta Platforms makes its money from ad revenue across its family of apps, such as Facebook, Instagram, and WhatsApp. That exposes it to economic whims and whispers as advertising budgets adjust to corporate budgets that loosen and tighten.
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Ad revenue improved in Q2, but that wasn't because advertisers uncorked budgets. Instead, geographic mix played a role. Ad impressions rose 34%, but the price per ad fell by 16% from last year because growth was highest in regions with lower ad prices.
Strength in China resulted in "rest of world" ad growth of 16%. Growth in Europe, North America, and Asia-Pacific was 14%, 11%, and 10%, respectively.
Thanks to the dollar's weakness since last fall, currency conversion negatively reduced total ad revenue by just 1%. Management expects currency to be a 3% tailwind in Q3.
No. 3: Reels Is Paying Off
A few years ago, Meta Platforms was more interested in building an audience for Reels to compete against TikTok than how to profit from it. That's changed. Now that Reels has achieved cruising altitude, Zuckerberg has flipped the switch to monetizing it.
Zuckerberg says 75% of Meta's advertisers use Reels ads, making Reels a $10 billion business. It was a $3 billion run-rate business last fall.
No 4: More People On Meta's Platform
Facebook has been around for a while, so its best days of surging user growth are behind it. Nevertheless, more people used its family of apps last quarter, which is good news for future ad revenue.
At Facebook, specifically, daily active users averaged 2.1 billion for June, up 5% year-over-year, while monthly active users were a little over 3 billion, up 3% year-over-year. Wall Street expected closer to 2 billion daily and 3 billion monthly users, so engagement was better than expected.
Overall, the company's family of apps served an average of 3.1 billion people in June, a 7% year-over-year increase. Family monthly active people was 3.9 billion, up 6% year-over-year.
No. 5: Meta Platforms Is Leaner and Meaner
Zuckerberg has labeled this the year of efficiency, and he means it. Cost-cutting gives his company more wiggle room, while technology helps fewer employees deliver solutions faster.
General & administrative expenses, excluding legal costs, were $2.3 billion, the lowest in two years.
Meta Platforms is guiding for capital expenditures below $30 billion this year, down from previous $33 billion estimates. That's largely because of server cost changes for non-artificial intelligence projects. Some spending, however, is only being pushed back. Zuckerberg says data center spending will be higher next year, especially for AI-related projects.
"Now that we've gotten through the major layoffs, the rest of 2023 will be about creating stability for employees, removing barriers that slow us down, introducing new AI power tools to speed us up," said Zuckerberg. "I'm going to be focused on continuing to run the company as lean as possible."
No: 6: Meta Platforms Has an AI Plan
It's almost silly how often companies mention AI on their conference calls this year. Nonetheless, increasingly "smarter" programs are being leveraged for ad and user engagement growth.
For example, the company said Meta Advantage is using AI to help monetization by automating ads. It also recently deployed Meta Lattice, a tool for predicting ad performance.
On engagement, Zuckerberg said AI-recommended Facebook content is the fastest-growing category. Recommending content to users that otherwise might have gone undiscovered helped boost time spent on Facebook by 7%.
Zuckerberg believes people will eventually interact with many generative AI programs daily, suggesting AI customer service agents could increase the adoption of Meta Platform's business messaging solution.
However, he also seemed measured about AI's promise, perhaps because of his metaverse experience.
"The reality is, we just don't know how quickly these will scale, and we want to have the capacity in place in case they scale very quickly, but because they're kind of brand new things and there aren't that many precedents for things like this, it's actually quite hard to forecast," said Zuckerberg.
Forget Meta Platforms – We’re buying this tech stock
No. 7: A Promising Start for Meta's "Twitter Killer"
In a nod to doing more with less, Zuckerberg pointed out that its new Twitter (eh-hem, I mean "X") competitor, Threads, generated nearly 100 million sign-ups in its first few days.
The key now is to see how many who signed up return daily. Don't expect any needle-moving ad dollars from Threads yet. Like the Reels playbook, the focus will be on user experience first and profit second.
"We'll focus on growing the community to the scale that we think is going to be possible. Only after that, we are going to focus on monetization," said Zuckerberg.
