Meta Platforms fell 10% since earnings announcement. Can Meta make a comeback?

• Meta stock is currently trading 15.94% lower than its all-time high.

• Despite the recent 10% drop on earnings result day, Meta stock is still trading 12.29% higher than its 4Q2023 earnings release on February 1st. This indicates that the recent pessimism hasn't completely erased the gains it generated since the 4Q2023 earnings results.

1Q2024 Earnings Result:

• Revenue: USD36.46 billion vs. USD36.16 billion expected

• EPS: USD4.71 vs. USD4.32 expected

Source: Reuters

Source: Meta's Earnings Slides

The 10% drop in stock price on earnings day were due to:

Weaker earnings forecast:

• 2Q2024 total revenue is expected to fall within the range of $36.5 billion to $39 billion, with a midpoint of $37.8 billion.

• This misses the street estimate of $38.3 billion. Additionally, management anticipates a higher year-over-year operating loss from Reality Labs.

Higher expenses:

• Guidance for expenses and capex has increased to support AI and Metaverse investment.

• Total expenses for 2024 are expected to range between $96 billion and $99 billion, compared to the earlier guidance of $94 billion to $99 billion.

• Capital expenditures for 2024 are projected to range between $35 billion and $40 billion, up from the earlier guidance of $30 billion to $37 billion.

Improving Efficiency:

• The total number of ad impressions increased by 20% year-over-year, while the average price per ad rose by 6%, driven by AI models and Reels which continue to boost engagement.

• Video content currently accounts for over 60% of the time spent on both Facebook and Instagram.

• 30% of posts on the Facebook feed are delivered by the AI recommendation system, doubling over the last couple of years.

• Advantage+ Audience targeting resulted in, on average, a 28% decrease in cost per click or per objective compared to using regular targeting.

Conclusion:

• Meta has encountered numerous challenges in the past, including high Capex on the Metaverse, reduced ad effectiveness due to Apple's privacy changes, and intense competition from TikTok.

• Despite these challenges, Meta has successfully navigated them and has risen to its current price level, which is just 15.94% below its all-time high.

• If the investments in AI and the Metaverse do not yield the expected results, Meta may resort to cost-cutting measures such as mass layoffs and reduced Capex.

• However, we believe that the integration of AI holds greater potential for success compared to the Metaverse. Meta's AI tools have practical use cases, particularly in user engagement and advertising revenue generation. Afterall, the company derives 97.7% of its revenue from advertising.

• We anticipate that revenue growth momentum may provide upside surprises, driven by major events such as the Olympic Games in Paris, the 2024 Copa América, and the 2024 United States presidential election, which are expected to boost advertising revenue.

• Additionally, recent US efforts to force TikTok to be banned or sold could benefit Meta Platforms.

• TikTok boasts a higher engagement rate of 5.53% compared to YouTube Shorts' 3.80% and Reels' 4.36%. Thus, Reels stands to benefit the most from a potential TikTok ban or forced sale.

• Overall, the 1Q2024 earnings results are solid.

• AI has played a significant role in driving user engagement and monetization efficiency, and we believe that the continued investment in AI Capex is well spent.

• The current Bloomberg consensus 12-month target price is USD 527.12, representing an 18.9% upside potential compared to Friday's closing price of USD 443.29.