Earnings season for the quarter ended March 31 is heating up, and this has been the busiest reporting week for the technology sector. Meta Platforms (META -1.16%) delivered its results after the market close yesterday, and investors have sent its stock soaring.
The company was under scrutiny for most of 2022 because investors felt its focus was misplaced. But CEO Mark Zuckerberg has made a series of adjustments to rescue Meta's stock price, which, at one point, had suffered a peak-to-trough collapse of 76%.
A combination of artificial intelligence (AI) and cost cuts have put the company back on track. Here's exactly what investors need to know.
Down with the metaverse, up with artificial intelligence
The metaverse was at the core of investors' concerns last year -- specifically, the amount of money Meta was spending on developing the virtual world. The company's Reality Labs segment, which is building the software and the hardware for the project, burned $13.7 billion in 2022.
In Q4 2022, Reality Labs' quarterly net loss reached an all-time high of $4.2 billion. But investors were pleased to see that number come down to $3.9 billion in the first quarter of 2023, reflecting Meta's renewed focus on efficiency.
But while the metaverse had been a drag on Meta's bottom-line results, the company was also struggling to generate advertising revenue from its core platforms, Facebook, Instagram, and WhatsApp. The poor economic climate was one factor, which has prompted Meta to lay off 21,000 employees since November last year, but the company was also facing its greatest competitive threat since its founding: ByteDance's TikTok.
The TikTok platform uses a short-form video format, but its real secret sauce is the AI-powered recommendation engine that feeds content to users in its feed. It has succeeded in attracting young users, and it's keeping them engaged for 32 minutes per day, according to Broadband Search (compared to Instagram's 29 minutes). Meta answered the challenge by launching its Reels short-form concept on Instagram and Facebook.
Its AI-driven recommendation engine has continued to improve, and in Q1, the company observed a 24% increase in time spent on Instagram as a result. It says 20% of the content viewed on that platform, and also on Facebook, is now curated by AI.
Meta returns to growth
Naturally, the more time users spend on a social media platform, the more revenue it attracts from advertisers. Meta was struggling to monetize Reels last year while engagement was still low, and the format was also stealing time spent away from features like Stories, which monetizes at a much higher rate.
But thanks to AI, Meta says monetization efficiency on Reels increased by 30% on Instagram and 40% on Facebook in Q1 compared to just one quarter ago. Additionally, revenue from Meta's Advantage+ Shopping Campaigns has grown sevenfold in the last six months. Advantage+ uses machine learning to help businesses target the audiences most likely to buy their products, and it also assists with the creation of ad content.
The result? Meta delivered its first quarterly revenue increase on a year-over-year basis since Q1 2022. In the chart below, the red columns reflect Meta's shrinking revenue for most of last year (year over year).
More revenue, less money burned on the metaverse, and a series of cost cuts, including employee layoffs means more money is now flowing to Meta's bottom line as profit. While the company's net income hasn't returned to year-over-year growth, its Q1 result marked the second consecutive quarter it increased sequentially.
Why Meta stock is a buy right now
Meta shares have soared 87% so far this year on the back of the company's strategic shift. Now that some of the results are showing up, expect investors to remain bullish.
Meta has generated $8.06 in earnings per share over the last four quarters, and based on its current share price of $240, it trades at a price to earnings (P/E) ratio of 29.7. That's slightly more expensive than the 26.7 P/E ratio of the Nasdaq-100 index, but Meta's future potential warrants a premium. Plus, with revenue and net income now growing again, investors will likely price the stock with higher future earnings in mind.
The company intends to use AI in a number of ways over time, and its work in the field is only just beginning. For example, its click-to-message ads service on WhatsApp grew 40% in Q1, and Meta is developing AI agents that businesses can deploy to interact with customers on their behalf. That will drive unprecedented scale for even the smallest of enterprises, allowing them to handle multiple customer queries at once.
Plus, Meta continues to build large generative AI language and visual models, three of which it has open sourced. It says they will pave the way for new product releases, and the company feels it's no longer behind in this space, but rather has the potential to be a leader. If that's true, it could be sharing in trillions of dollars of new opportunities over the next decade.
Meta's growth is seemingly back on track and profits are ticking higher once again, which alleviates concerns its social media platforms have grown stale. That significantly de-risks the stock, and investors have an opportunity to buy it ahead of the AI revolution that is only just getting warmed up.
