Shares of Meta Platforms Inc. (META, Financial) surged almost 10% in pre-market trading on July 27 after the company reported strong numbers for the second quarter.
The company has recentlly been under pressure due to the impact of its substantial metaverse investments on its operating margins. The company started 2023 with a promise to significantly improve business efficiency, so its financial results suggest it has made notable progress on this front. However, it still has a long way to go.
Strong performance across the board
Meta's performance highlights the competitive advantages it enjoys.
For example, while some of its peers are struggling to grow advertising revenue, the company reported an 11% year-over-year increase in revenue to $32 billion, ahead of the $31 billion expected by analysts. On the back of the stellar revenue growth, operating income rose 12% year over year to $9.39 billion, while the operating margin remained flat at 29%. Higher operating profits helped the company book a 16% increase in net income to $7.8 billion.
Improvements in cost structure
The company saw notable improvements in its cost structure as well. Its cost base increased sharply in the third and fourth quarters of 2022 as Meta aggressively invested in the Reality Labs division to pursue a metaverse-focused future. After promising to cut back on expenditures to help its operating margins, the company has made notable strides in the last couple of quarters.
For instance, research and development costs accounted for 33% of revenue in the prior-year quarter, but declined to 29% of revenue this year. Capital expenditures also fell from $7.7 billion last year to $6.5 billion. Similarly, marketing costs declined from 14% of sales to 10% in the second quarter. The company’s cost savings measures seem to have delivered the desired results, enabling it to avoid a deterioration of its profit margins.
User acquisition and monetization power
Meta Platforms' user acquisition was also encouraging. The number of daily active people across its family of apps increased by 7% to 3.07 billion, while monthly active users gained 6% to 3.9 billion. Average revenue per user increased from $7.91 a year ago to $8.32, suggesting the company has made a strong comeback from its recent lows.
The most impressive aspect of Meta Platforms' second-quarter performance is the overall improvement seen across the board, whether it be user acquisition, cost management or revenue growth.
New products are off to a strong start
The social media giant has also seen success with some of its newer products. Threads, a Twitter-like platform for short-text posts, reached 100 million users in just a few days from its launch, which is a notable development as the company attempts to establish itself as the leading social media platform covering all bases. Only Instagram users can sign up for Threads currently, so the company is leveraging the app's massive user base to kickstart the growth of this new platform. Although it lacks many of the features offered by the Twitter Blue subscription, the company is likely to bring many of those features to it, thereby creating a formidable competitor.
Reels, which was introduced to compete with TikTok, has been in existence for a couple of years. The company’s monetization strategy for Reels seems to be working well. The annual revenue run rate for Reels across Facebook and Instagram has crossed $10 billion, a notable improvement from less than $3 billion in the third quarter of 2022. The successful monetization reveals the company’s ability to not just develop new products, but also make money out of those products. This is an area where many social media companies fail. Meta's strong relationships with advertisers, the massive user base and the wide array of ad measurement tools provided to marketers play a key role in attracting and retaining high-profile customers.
Further, the company’s new artificial intelligence-powered campaign management tools have gained traction in recent months, with many advertisers registering encouraging results by fully or partially automating their campaigns. The new Meta Advantage suite of products includes the AI Sandbox, which gives users access to several automated functions, such as text variation, background generation and image outcropping. Advantage+ Shopping Campaigns, on the other hand, allow users to use machine learning to target high-value customers, automatically test up to 150 creative combinations and streamline performance goals based on the target audience. Although these products are still in very early stages of development, the company’s investments are already paying off.
Valuation is reasonable
Meta Platforms trades with a forward price-earnings ratio of 25.5 compared to its five-year average of 23. This suggests the company’s valuation multiple has not expanded dramatically despite a 140% increase in its market value this year.
The company remains a growth machine, having registered double-digit revenue growth in nine of the last 10 years, with the exception being 2022. The last financial year proved to be a challenging one with Meta suffering from a slowdown in the global advertising market and operating costs skyrocketing on the back of investments in artificial intelligence and the Metaverse.
Its focus on improving efficiency has already delivered promising results for the first half of the year, so Meta is set to resume its growth story. Amid this improving outlook, the stock seems fairly valued.
Takeaway
Meta Platforms surged past $300 after it reported strong earnings for the second quarter. In addition to the success of its new products, the company will benefit from the monetization of WhatsApp in the coming years.
Investing in Meta at fair prices is likely to help investors realize market-beating returns in the long run despite the recent run-up of the share price.
