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Mohit Oberoi

With Zuckerberg's 'Year of AI' Still Ahead, Should You Buy or Sell Meta Stock After Earnings?

Meta Platforms (META) released its Q3 earnings yesterday after the bell, and while the stock is down 4% today, I believe the company is setting the stage for the long term despite the short-term headwinds. Here are the key takeaways from the report, and how the company’s CEO Mark Zuckerberg intends to steer the company in the coming year.

Meta reported revenues of $34.15 billion for the September quarter, which was ahead of the $33.56 billion that analysts expected and towards the upper end of the company’s guidance. Earnings per share came in at $4.39, which was also well ahead of the $3.63 that analysts expected. Among other factors, strong demand from advertisers in China - who used Facebook to reach consumers in other geographies - helped propel Meta's earnings. 

Meta's daily active users and average revenue per user were also slightly ahead of estimates. While most metrics in the Q3 report were better than what Wall Street expected, the company’s Q4 guidance offset the positive surprise.

Meta’s Q4 Guidance Spooked Investors

The company expects to post revenues between $36.5 billion to $40 billion in Q4 - which, at the midpoint, is below the $38.9 billion that analysts expected. Also, the guidance range is wider than usual, which the company’s CFO Susan Li attributed to “more volatility” than it has witnessed since the beginning of Q4.

While Li said that it's “hard” to attribute the recent demand weakness to any particular event, she added that in the past, the company has previously experienced softer demand during periods of geopolitical tensions – including during the start of the Russia-Ukraine war in 2022.

Li summed up, “We've reflected the latest trends and advertiser reaction that we've seen into our Q4 outlook, which again, we think, reflects the greater uncertainty and volatility in the landscape ahead."

2023: The “Year of Efficiency” for Meta

Zuckerberg touted 2023 as the “year of efficiency” for Meta, and the company has shed almost a quarter of its workforce over the last year. Thanks to these mass layoffs, as well as the reduction in overheads, Meta has been able to cut down on costs drastically, and has now slashed 2023 expense guidance to $87 billion to $89 billion. Its Q3 operating margin was the highest in two years on aggressive cost cuts and double-digit revenue growth.

Zuckerberg said that efficiency will continue to be the company’s focus going forward, as it strives to remain what looks like “leaner for longer.” During the Q3 earnings call, he said that Meta is “planning to continue focusing on operating efficiently going forward, both because it creates a more disciplined and lean culture and also because it provides stability to see our long-term initiatives through in a very volatile world.”

AI Will Be Meta's 2024 Focus

While Zuckerberg did not specifically term 2024 as the “year of AI,” the overall tone of the earnings call seems to suggest as much. At the beginning of the earnings call, Zuckerberg emphasized that artificial intelligence (AI) would be the biggest investment area for Meta in 2024. He also added that the vision articulated at Connect – its 2-day event held last month, focused on AI, virtual, and augmented reality – is going to be the company’s “theme for much of the next year.”

The CEO also listed how AI is helping Meta Platforms, and said that time spent on Facebook and Instagram has risen in 2023 by 7% and 6%, respectively, due to recommendation improvements - which he attributed to feed recommendations driven by AI.

He also added that Meta’s AI tools for advertisers are showing results. Half of the advertisers on the family of platforms are using Advantage+ creative tools to improve the text and images in their ads, with Advantage+ shopping campaigns nearing a run rate of $10 billion. Zuckerberg expects business AIs that help businesses use AI in customer interface will be a focus area for 2024 – particularly in developed markets, where labor costs are high and using AI makes business sense for companies.

As the company’s expenses, headcount, and capex are expected to rise in 2024, Meta now appears to be banking on its AI initiatives to do the heavy lifting next year, after the focus on “efficiency” helped the stock more than double in 2023.

Key Takeaways from Meta’s Q3 Earnings Call

While AI was the key talking point during Meta’s Q3 earnings call, here are some of the other key takeaways from the report:

  • Reels is now “net neutral” to Meta’s overall ad revenues: During the Q3 earnings call, Meta said that Reels – a division where monetization was a sore point until a few quarters back – is now “net neutral” to its overall revenues. The company will no longer quantify the revenue contribution from Reels going forward, terming it a “core part” of the apps.
  • Meta is not giving up on metaverse investments: While Meta will invest in AI and Threads – its Twitter-like platform – it is not giving up on the metaverse, and expects losses for its Reality Labs business to increase YoY in 2024.
  • Meta did not comment on the rumored subscription offering in Europe: As far as its reported subscription plan under consideration in Europe, Meta only gave the typical stock reply that it is “engaging” with regulators on its proposed consent model. Li, however, said that the company is actively monitoring the regulatory landscape, as these headwinds could “significantly impact our business and our financial results.”

Is Meta Stock a Buy or Sell?

While there are valid near-term concerns about Meta as the geopolitical turmoil takes its toll on business sentiments, I believe that with an aggressive pivot to AI, the Menlo Park-headquartered company is setting the stage for long-term outperformance.  As I noted during Meta’s pre-earnings analysis, reasonable valuations and a decent growth outlook make Meta a good stock to buy, and any dip in the share price could be an opportunity to add to the position.

On the date of publication, Mohit Oberoi had a position in: META . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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