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 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. 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). In 2024, META plans to launch an upgraded video player on Facebook, merging Reels, longer videos, and live content to further enhance the competition with TikTok.

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). 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 Furthermore, META has been using generative AI to improve the customer experience with AI stickers, AI-based editing tools, and an advanced conversational assistant.

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. The model is compatible with multiple platforms, including Hugging Face, PyTorch, TensorFlow, and Jupyter Notebook. Companies leveraging AI at scale tend to receive higher valuations, indicating the market's recognition of AI's significance.

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 29% in FY23 to 34% in FY26F. 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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