Meta, formerly known as Facebook, delivered a stunning update that caps one of the most impressive turnarounds in recent memory. Following its earnings report, shares soared more than 20% to reach all-time highs, eclipsing $450, or a fivefold increase from the lows of $90 reached in late 2022. This monstrous move set a new record for most market capitalization added in a single day, an increase of $197 billion.
At the heart of Meta’s success lies its Family of Apps, which include Facebook, Messenger, Instagram, and WhatsApp. They are used by over 3 billion people daily and nearly 4 billion monthly, that’s literally half of the entire world! Meta makes money by selling targeted ads to its many users. Globally, Meta generates more than $40 per user annually, a figure that climbs to more than $200 per individual in the US. Meta’s platforms not only collect data about users but also track their actions, enabling advertisers to precisely target demographics and gauge the efficacy of their campaigns. This precision and measurability make Meta’s advertising platform highly appealing to advertisers worldwide.
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The stock’s rollercoaster ride can be attributed to Meta’s reliance on user tracking. In mid-2021, Apple introduced privacy changes to its iPhone platform, requiring users to “allow” apps to track their activities. Unfortunately for Meta, the change came at a poor time – coinciding with a $25 billion increase in spending to invest in the metaverse (hence the name change to Meta). Despite a slight dip in earnings in 2022, Meta swiftly adapted to the changes. With several platform updates, Meta is again capable of tracking user behavior. By 2023, earnings surpassed previous peaks, restoring investor confidence.
A significant aspect of Meta’s narrative today is improved operational efficiency. After years of overspending in pursuit of metaverse dominance, the company is focused on boosting profitability. This shift marks a maturation in Meta’s business, underscored by the board’s initiation of a dividend and authorization of an additional $50 billion for share repurchases. Despite the pivot, Meta remains committed to key investments like data centers, artificial intelligence, and infrastructure; to the tune of roughly $35 billion a year. It also still has a vision for the metaverse, as evidenced by the success of its Reality Labs division which surpassed $1 billion in quarterly sales, driven by consumers purchasing the Oculus virtual reality headsets for the holidays. This balance between prudent spending and future-oriented investment signifies Meta’s evolution to a mature stage where it can concurrently drive growth and return capital to shareholders.
Meta stands to benefit from artificial intelligence, particularly advancements in generative AI. Historically, Meta relied on its robust computer algorithms to organize customer data based on demographics like age, sex, or personal interests, to optimize targeted advertising campaigns. However, generative AI can delve deeper into data analysis, dissecting and interpreting the datasets on its own with the goal of optimizing advertising effectiveness further. By leveraging artificial intelligence to make ads even more tailored to consumer preferences, and thus more likely to result in a purchase or consumer action, the ads become more valuable to advertisers and ultimately more profitable for Meta. Furthermore, AI enables Meta to streamline delivery of these targeted ads, with fewer employees, which will free up additional capital to invest in future pursuits and increase returns to shareholders.
Meta has certainly regained its swagger. Fears of a potential Tik Tok takeover have dissipated, replaced instead by rapid growth of Facebook’s Reels, its own version of short video content. Through strategic cost-cutting initiatives, Meta has achieved impressive profitability improvements, driving shares to new heights. The transformation in investor sentiment over the past year is truly remarkable. Looking to the future, it seems the company is well positioned to capitalize upon emerging growth opportunities while simultaneously improving profitability and remunerating shareholders.
The views stated in this commentary should not be construed directly or indirectly as a recommendation to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice.
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