Meta Platforms, Inc. (META) operates as a social technology company. META builds applications and technologies that help people connect, find communities, and grow businesses. META operates under two segments: Family of Apps (FoA) and Reality Labs (RL). Daily active users in Meta Platforms stand at 3.1bn compared to its major competitor TikTok which has an estimated user base of 1.6bn.

Investment Overview

Reels has been META’s primary initiative to improve revenue driven by increased monetization. META noted that Reels has reached a monetization milestone earlier than expected where breakeven was achieved in 3Q23 (Dec YE) compared to guidance by end of FY23 or early FY24F. META continues to enhance monetisation and Reels is now estimated at net neutral to overall META’s ad revenue. In FY24F, Reels ad performance will stem from ranking improvements and making ads increasingly interactive. Users have reshared over 3.5bn Reels every day. Reels had 2.35bn monthly active users (MAU) in FY23 and is expected to increase to 2.50bn by FY24F. Meanwhile, constant legal threats to TikTok in US are also an indirect advantage for Reels as both platforms currently have over 150m users in the US. Reels monetization is ramping stronger than expected as the recommendation, targeting, and measurement algorithms improve due to investments in Artificial Intelligence (AI) and Machine Learning (ML).

META is leveraging AI and ML to rebuild its privacy-safe ad stack while continue investing on Metaverse. Advantage+, META's AI-based automation ad tool has seen strong adoption in e- commerce, retail, & CPG segments & almost all advertisers are using at least 1 AI ad product. META noted that, Advantage+ Shopping campaigns showed a 12% lower cost per purchase conversion and a 32% increase in Return on Ad Spend (ROAS). AI is a key investment area for META, and these product enhancements are expected to support continued reacceleration of META's core ad business. Furthermore, Metaverse remains the company’s long-term goal to support the future of social connection & next-generation of computing. Reality Labs crossed the US$1.0bn mark in 4Q23 and reached US$1.9bn for FY23. However, operating losses expanded by 18% y-o-y to (US$16.1bn) in FY23 and operating losses in Reality Labs will increase y-o-y due to ongoing product development efforts in AR/VR and further scaling of ecosystem.

META has launched the improved version due to three key reasons. We identify three key reasons for the launch of Code Llama 70B, and they are i) for improved coding assistance powered by AI which are efficient, ii) to compete with OpenAI’s GPT-4 with similar accuracy levels and iii) making AI more accessible by being an open-source model. Code Llama 70B is freely accessible and governed by the same license as Llama 2 and earlier Code Llama versions. This license permits researchers and commercial users to utilize and customize the model as needed. The model is compatible with multiple platforms and frameworks, including Hugging Face, PyTorch, TensorFlow, and Jupyter Notebook. It is important to note that companies that embrace AI and deploys at scale tend to command a premium valuation, hence we expect the market to capitalize on this evolving AI landscape.

META faces serious competitive pressure from TikTok and user activity shifting to TikTok will have a detrimental impact to META’s revenue. META’s margin would come under pressure if it continues to diversify away from its high margin segment, which is advertising.

Key earnings drivers are margin improvement from 20% in FY22 to 33% in FY25F. Improvements in AI and ML are expected to enhance ad return on investments (ROIs), resulting in healthier top-line growth, while the ramp-up of engagement and monetization in META's Reels feature could serve as a tailwind to revenue.

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