Meta Platforms Inc. (META:NASDAQ)

Last update - 27 July 2023 By James Woods

A current holding in Rivkin’s US Growth portfolio, shares in Meta surged 7% in after-hours trading following Q2 earnings which topped estimates.

Meta Platforms Inc. has delivered a strong financial result in the second quarter, exceeding expectations, driven by the success of Reels, Meta’s TikTok-style video format. With over 200 billion daily plays across Meta’s platforms, and an annual ad revenue run rate exceeding $10 billion, Reels continues to be a key growth driver. The improvement in content recommendation algorithms has been a notable factor in this success. Furthermore, Meta’s new Twitter-like app, Threads, has shown promising potential although too early to discuss monetization according to CEO Mark Zuckerburg.

Investors have responded positively to the results, reflected in a 7% gain in shares in after-hours trading. Q2 sales were reported at $32 billion, outperforming analysts’ average projections of $31.1 billion with revenue guidance for the next quarter ranging from $32 billion to $34.5 billion, also surpassing estimates. The company’s Q2 net income was reported at $7.8 billion, or $2.98 per share, slightly higher than the $2.92-per-share average analyst estimate. It’s also worth noting that Meta’s suite of products is used by more than 3 billion people daily.

Despite ongoing investments in artificial intelligence and anticipated increased expenditure in data centres by 2024, Meta remains committed to efficiency. This focus has led to job cuts and restructuring, cheered by investors which have seen the share price more than double year-to-date.  Meta’s AI investments are also seen as crucial in delivering more personalized content and ad recommendations and enhancing user engagement.

On the downside, the company’s push towards the vision of the metaverse through the Reality Labs division is expected to lead to higher losses in the near term, largely due to product development and technology expansion costs. This is expected to be offset somewhat by a continued focus on cost efficiencies and lower capex as Meta heads into Q3, with 20% top-line growth is anticipated, largely driven by about 34% expansion in impressions. It appears that the company’s upside from Reels and click-to-messaging ads will likely remain robust throughout the second half of the year.

The future appears optimistic for Meta, backed by its strategic initiatives, innovative product pipeline, and continued efforts to enhance user experience. The market has reacted overwhelmingly positively to this throughout 2023, with shares up 148% year-to-date before the announcement. While new AI products could be key drivers for 2024 growth, user growth is expected to be mainly driven by Instagram and WhatsApp.

As a holding within the momentum, while the share price continues to outperform on a relative basis, Meta remains an active buy recommendation within the US Growth portfolio.


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