Meta Posted Record Profit & Revenue in Q3 2023 but Warned of Uncertainty Ahead

Austerity Drive

Responding to the hardships of the past year Meta Platforms vowed to rein in spending and become leaner and more efficient. This austerity drive included staff layoffs, which have now been "substantially completed" and the company had 66,185, down 24% y/y, according to Wednesday's earnings report. ^[1]

Furthermore, total costs and expenses dropped 7% y/y, to $20.40 billion and the firm lowered its 2022 outlook to a range of $87-89 billion (from $88-91 bln previously). However, it projects expenses to increase to $94-99 billion next year.

Capital expenditures also narrowed significantly compared to a year ago, to $6.76 billion and although it raised the top-end projection for the year, now at $27-29 billion, it is still much lower than 2022. CapEx will widen in the next year though, to $30-35 billion, primarily due to investments in servers and data centers.

CEO Mark Zuckerberg reiterated his frugality commitment during yesterday's earnings call, saying he plans to "continue focusing on operating efficiently going forward". ^[2]

Record Top & Bottom Lines

The cost cutting efforts are working and the social media giant delivered another blowout report on Wednesday, continuing its comeback. Net Income rose to all-time highs of $11.583 billion in the third quarter and the 164% increase was the fastest in years, while operating margins doubled from a year ago, to 40%.

Its top line also improved further. After a series of negative quarters, it returned to revenue growth in the first quarter of the year and in Q2 it posted the first double-digit growth since the end of 2021. Yesterday's results showed further progress in Q3, as the social media giant registered record sales of $13.748 billion, accelerating by 23% y/y and the fastest pace in two years. Executives see new record in the fourth quarter, projecting sales of $36.5-40 billion.

Higher Advertising Spend

The digital advertising market had taken a blow last year, as spending budgets contracted due to a series of reasons, including high inflation and economic uncertainty, but there are encouraging signs in recent quarters. Global digital spending is projected to expand by 9.5% y/y this year and exceed $600 billion, according to Insider Intelligence. ^[3]

The improvement was evident in this week's results from tech giant Alphabet, whose ad-business accounts for most of its sales. Google Advertising brought in close to $60 billion in Q3, marking the second straight sequential increase. ^[4]

Meta has benefitted from the improved ad environment, since nearly all of its revenues are generated by ad sales and during Wednesday's earnings call, CFO Susan Li noted "continued strong advertiser demand" in the current quarter. However, new headwinds may have started to develop as she warned of uncertainty ahead, which led to the wider than usual revenue guidance. ^[2]

Ms Li observed "softer ad spend" at the beginning of the quarter, which coincides with the war in the Middle East. Although it's hard to attribute it to directly to any specific geopolitical event, the firm has seen similar softness after the war in Ukraine and other regional conflicts. It is also consistent with the messaging of Snap two days ago. The snapchat developer took note of "pauses in spending from a large number of primarily brand-oriented advertising campaigns", immediately after the Middle East war erupted. ^[5]

Increased Active Users

Apart from its impressive financials, Meta's user metrics are also improving. The results show resilience against heightened competition, with Reels, Meta's short videos and its answer to TikTok, continuing to gain traction. CEO Mark Zuckerberg said that Reels has driven "more than 40% increase in time spent on Instagram since launch". ^[2]

After crossing key thresholds at the start of the year, average active users continued to increase in the third quarter, at a solid pace. Daily active people (DAP) in the suite of the firm's apps (Facebook, Instagram, Messenger, WhatsApp, and other services) averaged 3.14 billion, a 7% y/y bump. Facebook on its own, averaged 2.09 billion daily active users (DAU), up 5% y/y.

Meta Platforms expanded its empire in late-July, with the launch of Threads, a Twitter rival text-sharing application, with extremely fast adoption within just a few days. The CEO is "very happy" with the trajectory of the platform, which has "a good chance" of reaching one billion users in a few years. It currently has just under 100 million monthly active people. ^[2]

Artificial Intelligence

Generative AI has emerged as the main battlefield in Silicon Valley after the launch of ChatGPT in late-2022, with tech giants like Microsoft and Alphabet competing for supremacy. Meta had put most of its energy and resouces into the Metaverse over the past couple of years, but has now refocused on Artificial Intelligence, which will be its "biggest investment area in 2024" according Mr Zuckerberg. ^[2]

The technology is already improving many aspect of its business, including advertising and user engagement. The CEO alluded to this during the latest earnings call, saying that progress on AI is responsible for "a lot of our product and business performance".

He said that time spent on Instagram and Facebook has increased 6% and 7% respectively this year due to AI-driven feed recommendations and believes that "more of the content that people consume is going to be either generated or edited by AI" over time. The tech behemoth is leveraging AI in its ad-business, which is creating "improved performance for advertisers", according to CFO Susan Li. ^[2]

In last montth's annual Connect conference, Meta Platform announced a slew of AI-powered features and products. Most notably an Artificial Intelligence assistant available on WhatsApp, Messenger, and Instagram, for real time information, image and text generation and AI Studio, which allows corporations to build custom chatbots for ecommerce and customer support.

Metaverse & Mixed Reality

One of the reasons for Meta's slump in 2022 was the persistence on building the still obscure and costly Metaverse, which has lost around $11.5 billion in the first nine months of the year. The company remains committed to building this digital world, albeit as a longer term pursuit, expecting further losses ahead, as it tries scale the ecosystem.

Augmented/Virtual Reality (AR/VR) headsets is a key part of the Metaverse and Meta recently launched its the newest Ray-Ban smart-glasses and its most advanced VR device, the Quest 3 with improved passthrough ^[6]. Meta will compete with Apple in this niche market, since the latter will release its Vision Pro headset early next year. Apple's entry could help lift the still nascent market, which can help Meta.

Meta on a Roll

Meta Platforms has regained its mojo with its cost-cutting initiatives and the renewed emphasis in Artificial Intelligence, which already has beneficial impact on its business, helped by the improved advertising environment. Markets like what they see and its stock has rallied around 150% in the first nine months of the year, outpacing most of its Magnificent Seven peers, apart from Nvidia who has enabled the AI revolution.

Wednesday's Q3 results are a testament to its progress, but its stock drops in today's pre-market as investors are worried about the "softer ad spend" remarks amidst broader poor market sentiment. Meta is on a roll this year, but the advertising warning underscores some of the challenges that still lie ahead. The Metaverse losses continue and although the overall improved financials have made investors worry less for now, concerns could resurface. Trying to deliver on both the Metaverse and AI, while being frugal in a highly uncertain environment is not an easy task.