Meta Platforms Posts Double-Digit Revenue Growth in Overall Impressive Q2 Report

Strong Financials

The Magnificent Seven dominate this week's earnings calendar, with strong results from AI rivals Microsoft and Alphabet. Meta Platforms carried the torch on Wednesday, with an overall impressive second quarter, building on the solid results of the previous quarter.

Net Income increased by 16% y/y, to $7.788 billion, while Operating Margins widened sequentially, to 29%. More importantly though, Revenues soared to $32 billion, up 11% y/y, in the first double-digit growth in over a year. Forward guidance was encouraging, since the firm project Q3 sales to increase to $32-34.5 billion, which could top the current the Q1 2021 record high ($33.67 bln). ^[1]

Improved Advertising

The main revenue engine of the social media giant is advertising, which had taken a hit last year from high inflation, economic uncertainty and the lingering effect of Apple's App Tracking Transparency (ATT) policy.

These headwinds have moderated over recent quarters and Wednesday's results alluded to the improved environment. Ad-impressions increased 34% y/y in Q2, much higher than the previous quarter. During the earnings call, CFO Susan Li took note of "good progress" on Reels monetization, with "more than 3/4 of our advertisers now using Reels ads". ^[2]

Efficiency Progress

CEO Mark Zuckerberg had dubbed 2023 as the "Year of Efficiency", with cost cutting measures, which included the layoff of thousands of jobs. Yesterday's results showed that the company is staying laser-focused on the pursuit to become more efficient.

Although Cost and Expenses increased marginally from the previous quarter, Capital Expenditures dropped to $6.35 billion and the firm lowered the 2023 estimate again, to $27-30 billion. However, expenditures are set to grow next year, due to investments in support of AI advancement.

Increased User Engagement

Meta's user base has been expanding in recent quarters and its Family of Apps (Messenger, Facebook, Instagram, Whatsup) crossed the 3 billion mark in daily active users (DAP) in Q1, for the first time in its history.

According to yesterday's results, the number of average daily users increased and the pace of growth accelerated in the second quarter, for both the Family and Facebook itself. Family daily active people (DAP) stood at 3.07 billion on average, up 7% y/y. Facebook daily active users (DAUs) rose 5% y/y, to 2.06 billion. Mr Zuckerberg spoke of "strong engagement trends" across all apps. ^[2]

Twitter Rival App

In a bold move earlier this month, Mr Zuckerberg expanded the firm's social media presence, with the launch of Threads, a text sharing application that competes with Twitter. Threads exploded with 100 million signups within just a few days. ^[3]

The CEO is "quite optimistic" about the trajectory of the new platform, according to his comments on Wednesday's earnings call, noting that "we're seeing more people coming back daily than I'd expected". Now it's about retention, user base expansion and eventually monetization. It remains to be seen if Threads can pose a credible alternative to Twitter and whether it can achieve that, while trying to cut costs.

Metaverse & VR

Meta Platforms spent too much money and resources on the Metaverse last year, which investors did not like, given the challenging environment the tech sector faced and the fact that it had little to show for. CEO Mark Zuckerberg has - in a subtle way - scaled down this pursuit, but remains committed to this vision, which continues to burn a hole in the firm's balance sheet.

Reality Labs, the segment responsible for developing the Metaverse and related products, lost $3.739 billion in Q2 and the company expect year-over-year operating losses to increase in 2023. Markets don't seem to be as concerned about these losses though at this stage, because Meta is cutting costs and has returned to revenue growth.

Essential to the Metaverse are the Augmented/Virtual (AR/VR) headsets, with Meta being the main driver of this market. Last month it unveiled its most powerful VR goggles yet ^[4] and the Meta Quest+ VR subscription service. ^[5]

Now Meta may get some tough competition, as tech giant Apple is about to enter the VR arena, having recently unveiled its own virtual reality headset. However, this could prove beneficial for Meta, since Apple's involvement could lift this niche market out of obscurity.

Artificial Intelligence

Meta has been doing Artificial Intelligence work for a long time, but that seemed to run in the background, as it was focused on the Metaverse vision. After OpenAI took Silicon Valley by storm with ChatGPT, Mr Zuckerberg shifted his immediate attention back to Artificial Intelligence.

This is crucial, as the AI capabilities will filter through essentially to every aspect of Meta's business and across all products and services. The CEO spoke of some "ground-breaking AI products in the pipeline" and highlighted some of the existing application of the technology. ^[2]

He noted that AI recommendations on Facebook's feed (from accounts one does not follow) is now the "fastest growing" category, which has led a 7% increase in spent on the app. AI is also important for the firm's monetization tools, with "almost all" advertisers using at least one of Meta's AI-driven products. The firm also partnered with Microsoft to open source Llama 2, its large language model.

Meta Gets its Mojo Back

The social media giant had a very bad 2022, but has turned things around with a series of initiatives. It shifted away for the obscure and costly Metaverse, turning its immediate attention to Artificial Intelligence, while implementing cost cutting measures. At the same time, the advertising environment has improved and the above were evident in Wednesday's Q2 report and the double-digit revenue growth. It is clear that Meta Platforms is getting its mojo back and the launch of a new app to rival Twitter, is a sign of that.

The stock has more than doubled in the first half of the current year and markets reacted positively to yesterday's results, pushing the price higher in extended trading. However, pitfalls still lay ahead. Meta has some catching up to do on the AI front and Threads will need work to compete with Twitter, while at the same time trying to deliver on the year of Efficiency pledge.