It seems like just yesterday—actually, it was October 2021—that Mark Zuckerberg announced Facebook would be rebranded as Meta Platforms (META).
Facebook was going all-in on the metaverse. Some wondered why. After all, the company’s stock was up 70% over the prior two years as the pandemic boosted social media businesses.
A Facebook face plant soon followed that announcement. Wall Street was suddenly worried about things that had been apparent for a while, such as slowing user growth, Apple’s (AAPL) new privacy rules, and the vast amounts of money being incinerated by Meta’s virtual reality division (the center of its metaverse dreams). All of this led to Meta’s stock plunging by 70% in the first nine months of 2022.
But over the last nine months, Meta’s fortunes completely turned on a dime—in fact, its stock has tripled! What happened, you ask?
Once again, the secret sauce was AI (artificial intelligence). Zuckerberg—having touted the wonders of the metaverse last year—is now riding the AI wave.
So, what’s next for Meta?
Meta: AI and Advertising
Meta has done a lot of cost-cutting recently. For instance, it has laid off about 25% of its workforce since November. But, it needs more than that in order to justify its price-to-earnings (p/e) multiple of 35 and its forward p/e of 25.
Meta needs to become a growth company again. And to do this, it is relying heavily on AI-driven enhancements to its core advertising business.
The capital expenditures needed to drive AI advancements (and the metaverse) are centered on the same thing: server and computing power.
Meta has been investing heavily on this front. Over the past two years, its CapEx totaled a cumulative $64 billion, up from $34 billion in the previous two years. The company has guided for CapEx spending in 2023 to be between $30 billion and $33 billion, and a large portion of the spending so far has been on graphics processing units (GPUs) to increase Meta’s AI capabilities. I wonder if Nvidia (NVDA) has sent Zuckerberg a thank you card?
Thanks to Apple’s privacy policy, Meta can no longer track users across the internet. So, to improve its advertising efficiency without the use of website tracking, Meta must use its own proprietary data. It has a lot of it, with billions of users interacting with a range of different content every day.
What Meta does now is bucketing users based on what they do on Instagram and Facebook. Then it sends them ads it thinks they are likely to interact with. This is the end result of Meta’s AI investments, which support the building of its Discovery Engine, which ranks posts regardless of where they come from (a bit like TikTok).
AI Is Helping
The early signs are that these investments into AI are paying off. In the first quarter of 2023, ad revenue rose 4% to $28 billion, the first year-on-year quarterly increase since the end of 2021. Meta appears to be retaking market share in a tough ad spend/macroeconomic landscape in the past 18 months.
Wall Street expects much more to come. In 2022, Meta had $50 billion in operating cash flow and—with its new AI capabilities—analyst consensus expects this to rise to $80 billion by 2026. Keep in mind that the company’s ability to produce strong cash flows has been at the forefront of its success over the past decade. Free cash flow per share growth over the five years to 2019 stood at an impressive 40% per year.
Over the next five years, analyst consensus puts that growth rate at 10%. Yes, that’s a big drop-off, but it is still a healthy level of expansion, considering free cash flow in 2022 stood at almost $20 billion.
Meta’s days of heady growth are likely gone…but so is the worst-case scenario spouted by bears.
I am growing more optimistic about the company’s initiatives in shifting toward a content-driven discovery platform, rather than having ads organized solely on users’ personal accounts, with a greater emphasis on shorter-form video (Reels) content.
Meta seems to have actually bolstered its competitive moat, and is still capable of churning out some growth. And it seems that TikTok’s competitive threat is receding, thanks in part to the U.S. government.
Let’s not forget that Meta has more users (nearly 3 billion monthly active users) and usage time than any other social network. That translates to it providing the largest audience and the most valuable data for social network online advertising.
Meta might not be a mega-high-growth stock anymore, but it is still worth buying as a resilient stock. Use any general stock market to start building a position.
