To The Moon

$Meta Platforms, Inc.(META)$ continued its strong recovery in the Q3 earnings report, with its primarily advertising-based business. In addition, its extreme cost-cutting measures have resulted in operating profit margins reaching their highest level in 2021.

The stock price initially surged by 5%after hours as a sign of respect, but then gave back all the gains and dropped an additional 3 points due to flat Q4 guidance and concerns about macroeconomic conditions, including the Israeli-Palestinian conflict. This is likely to serve as a guide for the overall market trend in the next one or two quarters: low sensitivity to positive news and easily controlled by risk sentiment.

Summary

Ad revenue was stronger than expected, but investors were not sensitive to the year-on-year growth rate of 23.5% because expectations were already high and some of it was priced in before the financial report.

Reels' commercialization progress is smooth, with Instagram's growth outpacing Facebook's. The overall ecosystem's traffic naturally increased by 7%, benefiting from the market share TikTok has conceded. There was little mention of Threads, and in the short term, it is difficult for it to compete with X (Twitter).

VR continues to perform poorly, with new products being released in October but not reaching the level of a phenomenon. Deep collaboration with suppliers and co-branding are the best ways to pave the way for the current stage. This also casts a shadow on Apple's VR product next year.

Cost-cutting measures have reached their extreme, resulting in a boost in profit margins to the highest level of 2021 and further strengthening the already strong cash flow and assets. As US dollar assets hold their value better during high-interest rate cycles, they provide strong support for the company's valuation.

Q3 Earnings Review

Users

Facebook Family's MAU reached 3.14 billion, a YoY increase of 6.7%; MAU was at 3.05 billion, a YoY increase of 3%, while DAU reached 2.09 billion, a YoY growth rate of 5%, and the DAU/MAU ratio remained stable. In terms of regions, the Asia-Pacific is the main driver of new active users, while Europe and the Americas are relatively stable.

Facebook's MAU only increased by 3.1% YoY, which means that the growth of Instagram and Reels was greater, in line with third-party data.

Revenue

Revenue was $34.15 billion, a YoY increase of 23%, twice the growth rate of Q2 at 11%, and higher than the market's expected $33.51 billion.

Advertising revenue was $33.64 billion, a YoY increase of 24%, higher than the market's expected $32.94 billion. Reality Labs' revenue was $210 million, continuing to decline YoY by 26%, highlighting that the Metaverse is still a distant dream and Quest Pro products are not impressive.

Profit

The overall gross profit margin continued to rise to 81.9%, the highest level in three years; the operating profit margin reached 40%, an increase of nearly 11% MoM, and also the largest surprise that exceeded market expectations, higher than the market's expected 33.9%. We previously mentioned that Q2 was affected by layoffs, and we expect Q3's operating profit margin to have room for improvement.

Diluted EPS was $4.39, a YoY increase of 168%, higher than the market's expected $3.63.

Investment Highlights

1. The advertising business is expected to be strong, stronger than expected.

The overall Q3 advertising business is good, and the expansion of Instagram and Reels is an important reason. The company's own efforts on Threads were even mentioned less frequently during the conference call, and we expect its decline to be similar to the market's previous expectations. Reel's commercialization also accelerated the contribution to advertising business, and Q3's advertising unit price was also lowered due to the higher growth but lower unit price of Reels. Although Reels' active users will continue to increase in several quarters, it is not easy to achieve an increase in advertising unit price, which is currently interpreted as "large volume but low price."

The recovery of the advertising business also completely shows that the impact of the previous iOS privacy policy changes has come to an end.

2. The Metaverse is still early.

Reality Labs' revenue has plummeted for two consecutive quarters, with revenue down 26% YoY, which is related to the periodicity of new products but also enough to show that the previously released products have not been recognized by the market and that the hardware device lifecycle is too short.

However, Meta is still a leader in the VR industry, and it can only be said that the story of the Metaverse is currently too virtual. After October, the company will release the next generation of Quest 3 and a co-branded Ray-Ban smart glasses, hoping to find greater business opportunities from upstream and downstream partners.

During the conference call, Mark Zuckerberg stated that the current management theme is "improving efficiency" and actively cutting projects that have no performance or may no longer be critical.

So, the metaverse business can only be said to be "enduring" for now.

3. Reduce costs, increase efficiency and improve profitability.

The Q3 gross profit margin of the company peaked at 81.8% in the first three years of listing, but the greater cost savings and efficiency improvements came from layoffs. The operating profit margin in Q3 increased by 11% to 40%, mainly due to the impact of layoffs.

At the same time, this year's capital expenditure guidance has been reduced by $1 billion, and next year's capital expenditure guidance for people is $30 billion to $35 billion, which is equivalent to an increase in expenditure of about 11% to 21% compared to this year. The main direction is investment in AI and non-AI hardware servers and data centers.

Valuation

Based on the closing price of $286 after the market on October 25th, the corresponding P/E ratio for 12 months is 25.5 times.

According to the current trend of cost savings and efficiency improvements, the market's expected EPS for 2024 will rise to $17.4, corresponding to a P/E ratio of only 16.6 times in 2024.

Although the company has stated that it is very susceptible to macroeconomic fluctuations, and next year's revenue prospects are uncertain, the conflict between Palestine and Israel has also affected the company's advertisers, and advertising spending was weak in early Q4. This may be due to changes in the overall macro environment, but considering the company's expectations management, there is a greater possibility of lowering market expectations.