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Shares of social-media giant, Meta Platforms (META) are on an absolute tear this year. Since the start of 2023, Meta stock is up a whopping 94%, compared to the S&P 500's ($SPX) 7.2% gain and the 16.5% rally in the Nasdaq 100 Index ($IUXX). Investors are wondering if Meta's stock can continue its impressive upward trajectory for the rest of the year.
Meta Is Wrestling With Tepid Growth
Meta was among the worst-performing tech stocks in 2022. In fact, shares of the tech heavyweight were down over 75% from record highs in November 2021. Investors were then worried about a sluggish macro-economy, competition from TikTok as well as changes to Apple’s (AAPL) iOS privacy policies, which resulted in lower ad spend by enterprises. Moreover, Meta confirmed that the iOS policy change will result in ad revenue losses of $10 billion, which is around 8% of the company’s total sales.
The double whammy of rising interest rates and elevated inflation levels also dragged profit margins lower, resulting in a significant pullback in Meta’s share prices between September 2021 and October 2022. Prior to Q1 of 2023, Meta reported a year-over-year revenue decline in each of the three prior quarters after experiencing several years of stellar top-line growth.
In 2022, Meta reported sales of $116.6 billion, compared to $117.9 billion in 2021. However, due to higher expenses, its operating profit fell from $46.7 billion to $28.9 billion in this period. We can see why investors were bearish on META stock, resulting in the sell-off. But is the worst over Meta investors, or will the stock continue to trail the broader markets in the near term?
The Bull Case for Meta
Currently valued at a market cap of $600 billion, Meta reported revenue of $28.64 billion in Q1 of 2023, an increase of 3% year over year, indicating an improving business environment. However, its adjusted earnings per share narrowed by 5% to $2.64 in the March quarter. In recent months, Meta has focused on trimming costs across business verticals by lowering its employee headcount. In Q1, the company’s sales and marketing expenses fell by 8%, allowing it to offset a portion of its rising costs.
Despite its massive size, Meta increased its monthly active users to 3.8 billion across its “Family of Apps,” which include Facebook, Instagram, WhatsApp, and Messenger. Facebook also surpassed 200 million daily active users in the U.S. and Canada, allowing it to end the quarter with 2 billion users globally.
A key driver of revenue growth for Meta in the next few years is Reels which continues to gain traction on Facebook and Instagram. Users now share over 2 billion Reels each day, an increase of over 100% in the last six months, resulting in higher engagement rates and monetization opportunities for the company.
Meta claims monetization efficiency for Reels has increased by 30% on Instagram and 40% on Facebook. Its click-to-message ads have also touched an annual run rate of $10 billion, while paid messaging on WhatsApp is up 40% year over year.
Meta competes with other social media platforms, such as TikTok and Twitter, for ad revenues. In the last few months, several big-ticket advertisers, including Coca-Cola (KO), have pulled ad money from Twitter while there is a chance for TikTok to be banned in the U.S. and many other countries. Both these developments are likely to act as tailwinds for Meta in the near term.
The Bear Case for Meta
Alternatively, here’s why the staggering rise of TikTok will continue to hurt Meta. TikTok is now a global social media behemoth with a presence in over 150 countries and a user base of more than 1 billion. A report from Omdia estimates the online video ads market to touch $331 billion in 2027. Moreover, TikTok is expected to account for $122 billion of these revenues, indicating a market share of 37%. Comparatively, in 2022, TikTok’s ad sales were forecast at less than $12 billion.
Additionally, Meta continues to allocate significant resources to build the metaverse. For instance, Meta’s capital expenditures rose from $19.2 billion in 2021 to $32 billion in 2022. But since 2019, the Reality Labs business has reported cumulative operating losses of almost $40 billion, compared to revenue of just $6.4 billion.
Meta’s Horizon Worlds, which is an iteration concept for a virtual world, ended 2022 with just 200,000 users, well below the company’s estimate of 500,000 users. Despite its sizeable investments, revenue earned from Reality Labs fell to $339 million in Q1, compared to $695 million in the year-ago period.
The Final Takeaway
Analysts tracking Meta stock expect sales to fall by 3.2% to $112.8 billion in 2023. But as the company accelerates its cost-cutting initiatives, adjusted earnings are forecast to expand by 19.6% to $11.8 per share. Moreover, its sales and earnings are forecast to rise by 10.8% to $125 billion and by 24.2% to $14.61 per share, respectively, in 2025.
Priced at 19.7x forward earnings and 5.3x forward sales, Meta stock continues to trade at a premium compared to the S&P 500.
But I believe Meta‘s cost savings program, expanding profit margins, and improved monetization rates allow it to command a higher multiple. Despite a challenging business environment, in my opinion there is still significant upside potential for Meta stock.
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