Meta Platforms Inc. (META, Financial) mainly gets its income from its ad revenues, but the online ad industry remains on a cyclical downturn in 2023, though it could begin a rebound in the second half of the year through 2024. As per Magna, global advertising revenue is forecasted to reach $833 billion in 2023, an increase of 5% from 2022's $795 billion. Manga predicted 2023 to be a year of slow revenue growth (only a 4% improvement to $330 billion) for U.S.-based advertisers. The significant impact on revenue growth is due to deteriorating cyclical ad spending. Globally, Magna forecasts advertising sales to grow by 8% to hit $557 billion.
Rising competition
Meta could experience accelerating competitive threats in 2023. Rapid developments in neural networks such as GPT-3 and GPT-4 have the potential to evolve the online ad industry landscape. For example, large language models and Chat GPT could threaten the business operations of online search and ad giants by taking users directly to the desired websites or platforms, making pages of ads and links irrelevant.
Then there's still the problem with Apple Inc. (AAPL, Financial), which limited the opportunities of advertisers by blocking their ability to track users across the web without their knowledge or consent.
Over the past decade, the duopoly of Alphabet Inc. (GOOG, Financial)(GOOGL, Financial) and Meta has reigned over the half of all online advertising, but in 2023, the duo may face more competition due to the above-mentioned factors.
Promising developments
Despite the headwinds, Meta's advertisers saw improved conversions by nearly 20% over the previous year, which proves that the company's efforts and investments in AI for improved targeting, lower acquisition cost and higher conversion have started paying off. Thus, Meta looks well-positioned to defend its market share in the foreseeable future.
Source: insiderintelligence.com
For the fourth quarter of 2022, Meta's advertising revenue totaled $31.3 billion (down 4.24% year-over-year). There was a year-over-year drop in ad revenue from all geographies except the "Rest of the World." Moreover, the operating income margin has deteriorated to 20% in the fourth quarter of 2022 from 37% in the same quarter of 2021, and net income was flat quarter over quarter at $4.65 billion.
The Family of Apps generated revenue of $31.4 billion (down 4.13% year-over-year), with operating income of $10.7 billion. Daily Active People reached 2.96 billion, implying a year-over-year growth of 4.96%, whereas Monthly Active People climbed to 3.74 billion, a 4.18% improvement.
Source: Meta Platforms
A leaner cost structure
In the fourth quarter, Meta recorded $4.2 billion in restructuring charges for severance and associated expenditures and the closure of several of its offices and data centers incurred during the quarter. The company's earlier decision to let go of 11,000 employees is reflected in the severance expenditures. The company's guidance also reflected a renewed focus on cost control and cost-cutting, provided its revised cost-cutting plan for 2023 from $94-$100 billion to $89-$95 billion. Management also trimmed its CapEx guidance for the year, saying it would spend just $30 billion to $33 billion, down $4 billion from its previous range, as it's shifted to a more cost-efficient model.
The deterioration in profitability and free cash flow might continue to be a concern for the market, posing a minor threat to investors' portfolios in terms of short- and mid-term returns. Meta's investors already suffered massive losses in 2022 (with the stock plumetting 64%). Not surprisingly, following the announcements with the revenue beat and a leaner cost model, Meta's stock jumped over 22%, approaching the $500 billion market cap threshold as Wall Street analysts rushed to boost the stock and hail the social media behemoth's "year of efficiency." The stock has gained 46% over the past month.
Reels and Whatsapp monetization
As per Meta CEO Mark Zuckerberg, Reels' plays over Facebook and Instagram have improved over two-fold during 2022. At the same time, the social component (resharing Reels) has improved more than two-fold in the last six months on both platforms. In addition, Meta's chief financial officer reported that user engagement through Reels is a significant source of ad impressions' growth with "ad load optimizations" over Reels, News Feed and Stories. Despite boosting user engagement, Reel's monetization is still in progress, but the encouraging signs from the engagement metrics portray a positive trend.
Meta is also focusing on monetizing WhatsApp over messaging ads through the application of in-app features that facilitate users' communication directly with businesses. Meta plans to continue monetizing messaging (click-to-message ads), representing revenue of $10 billion, and improving the engagement of more enterprises with the WhatsApp Business Platform (business messaging and B2C conversations). The efficient strategic execution of Reels and Whatsapp monetization could provide Meta with a sustainable revenue stream for the long term.
Source: hootsuite.com
Takeaway
Assuming Meta can resume steady bottom-line growth, the stock appears undervalued in my opinion. Still, Meta might trade sideways in the short run until the market digests the recent developments. I believe the price-earnings ratio of 22 provides a solid value opportunity for long-term investors.
