June marked the second consecutive quarter of growth compared to 2022 when revenue was down by 1%. Specifically, revenue growth outpaced Street expectations of 8% in the June quarter. Investors have been worried about the global ad market and both Google’s and Meta’s ad strength shows the ad market is healthy. Importantly commentary from both companies suggested the ad market should remain stable in the September quarter.
Nine months ago Zuckerberg announced that 2023 will be the year of efficiency for Meta. So far he has made good on that promise, but commentary about investment levels in the back half of 2023 and full year 2024 warrant what I see as a tweak in the company’s efficiency philosophy.
The big picture is the year of efficiency is still in play despite the company making greater investments in AI talent, AI infrastructure, and the metaverse (Reality Labs). The company is expected to grow expenses this year by about 2%, revenue by 15%, and earnings by 50%.
Most notable on the upcoming investment front, the company will be doubling down on the metaverse, a theme Zuckerberg has downplayed over the past six months given the focus on profitability. He now expects the company to spike investments in Reality Labs in 2024, going from what I expected to be $15B in 2023 to $20B plus in 2024. In total, I estimate the segment will account for about 20% of Meta’s spend next year.
Despite the step up in investment cadence, revenue and earnings should still grow faster (15% and 35%, respectively) than expenses (10%) in 2024.
Pulling it all together, I believe Meta has moved away from the “year of efficiency” and is now focused on the year of efficient growth. That means the company has moved beyond the hardcore cost-cutting chapter that included reducing headcount by 25%, compared to the average 8% headcount reductions in the rest of big tech. It’s clear Meta is going to invest for growth and return to its playbook that has yielded success over the past decade.
Meta’s platform is solid as measured by the all-important DAU growth. Global DAUs grew 5% y/y compared to 4% last quarter and an average of 3% in 2022. The higher-valued US DAUs grew 2.5% compared to 2% in March. The big picture is DAU growth remains higher than the 1-2% I was expecting for the first half of 2023. In the next couple of years, I believe DAU growth will flatten, but the Meta growth story will continue given the next period will be focused on increasing revenue per user.
Meta has two options for growth: AI and the metaverse.
AI. Today Meta uses AI to power its content feed on Facebook and Instagram. At the company’s upcoming Connect conference on September 27th, they will announce new AI products that will help creators make images, videos, and text for Instagram and the metaverse. Additionally, the company will likely announce its first AI agent. “AI agents” is becoming an industry term for a bot that has the ability to go beyond answering questions and actually do a task. Zuckerberg talked about the AI agent as being a customer service tool that can make changes to an account and solve a problem, likely integrated with enterprise chat.
Reality Labs (the metaverse). Call it the metaverse or spatial computing (Apple’s term), I believe the next computing interface will be game-changing. Zuckerberg is holding his ground that the potential around the metaverse is significant. As for the impact on numbers, it’s easy to estimate the cost, likely $20B plus in investment next year. While the payback period is more vague, likely a decade plus, I believe it will be additive to revenue and earnings by 2030.
At a higher level, based on comments from the recent earnings call, it’s clear Zuckerberg is at war with Apple over the metaverse/spatial computing. He believes Apple does not allow certain features (he called out app tracking) that have hurt business (and I believe have helped consumers). Zuckerberg does not want to be limited by Apple for the next twenty years when the consumer tech interface shifts to spatial computing as he has over the past decade when mobile was at the center of the tech experience.
Relative to some of the other mega cap tech companies that share Meta’s favorable growth profile and strong moat, Meta’s valuation is attractive. Currently, META trades at a lower multiple, 22x next year’s EPS, which is in line with Google and below Microsoft at 30x, Adobe at 30x, and Apple at 29x.
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