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Meta’s AI Roadmap Is Anchored in DAU Growth
Artificial Intelligence, Meta
The year of efficiency is already working as evidenced by March revenue exceeding estimates by 2% and EPS by 9%. The efficiency page will turn, and investors will soon be thinking about 2024, when the company’s opportunity in AI will be anchored by its current impressive DAU growth. That combo should start a flywheel of AI driving engagement and ultimately increasing revenue growth.

Key Takeaways

The year of efficiency is working, with operating margins climbing to 25% from 20% in December.
DAU growth continues to increase, the latest evidence that Meta’s products are addictive.
It's still early for AI, but it eventually will impact all of Meta’s products and likely be a long term positive for revenue growth.

Update on the year of efficiency

Meta is already showing progress in the year of efficiency. The company beat March revenue by 2% and EPS by 9%. If they did not have Reality Labs, EPS would have been $3.40 vs. the $2.20 reported, or 55% higher. That meant operating margins increased to 25% in the quarter compared to 20% in the back half of 2022. I believe these margins will continue to increase this year and reach 33% by the middle of next year. That number is below the company’s peak of 45.5% in December 2020 and in line with the 33% for the full year 2019.

As for headcount outlook, CFO Susan Li suggested they will grow headcount in the coming years by more than the 1-2% that was reported in the press from leaked internal comments.  The company clarified to expect headcount budgets to increase by 1-2%, and overall headcount to rise by more.

Within the next quarter, the Street will likely have priced in the year of efficiency, and shift the focus to the impact of AI across the company’s product lines.


DAUs marches higher

The engagement numbers stood out most to Deepwater as long term investors in Meta. The company reported 4.1% DAU growth, up from 3.7% in December, 2.8% in September, and 1.9% in June. I would have expected the growth rate to decline given the law of large numbers with just over 2B daily active users, which equates to about 40% of the global daily internet population.

The big picture is Meta’s engagement continues to rise despite a steady stream of bad press over the last eight years. It’s been a spectrum of challenging headlines including the Cambridge Analytica data scandal in 2015 and countless studies that concluded people feel worse about themselves after they’ve been on Facebook or Instagram. The reality is Meta’s products are addictive, and barring a resurgence in TikTok, DAUs will likely continue to inch higher, with what I expect to be a 1% y/y growth rate for the balance of this year.

The DAU topic is important because it’s the core asset of a social network. As long as that number inches higher, Meta has the opportunity to tweak its products to increase engagement and give the company more chances to sell ads. As for the engagement, there is ample room to increase time spent on Reels. Today, most of the company’s engagement is on Instagram, with an average of about 1 hour per user per day, ahead of Facebook at about 45 minutes a day. By comparison, TikTok users average 1.5 hours per day, suggesting Instagram Reels has plenty of room to grow.


The AI opportunity

Meta’s AI opportunity is built on top of the success the company has had in growing its user base. Going forward the flywheel will quicken between new AI features that will increase engagement and create new opportunities for AI to improve engagement. The good news for Meta’s AI future, it is already off to a good start given the existing 2.0B DAU user base into which the company can inject AI features.

On the earnings call, Zuckerberg commented that he can’t share many details about the company’s AI plans, but did have four important thoughts on the topic:

  1. They expect to start shipping AI-enabled products in the coming months.
  2. Zuckerberg believes AI will “help advertisers create more engaging experiences, which should create more engagement, and that, by itself, creates more opportunities for advertisers.”
  3. From the ad content perspective, he sees “a bunch of opportunities on the visual side to help advertisers create different creative.” That translates to cost savings for advertisers, allowing them to potentially pay Meta more for each ad.
  4. On the AI agent side, messaging for business is an obvious opportunity. Zuckerberg mentioned historically it was only larger organizations that had the resources to afford customer support. With AI chat, the cost of customer support will drop, making it affordable to “tens of millions of small businesses.” This is an example of AI supporting click-to-message ads, which in the December quarter reached a $10B revenue run rate. Since then the number of businesses using paid messaging on WhatsApp has grown by 40% quarter over quarter, suggesting the current annual run rate is about $12B, or about 10% of revenue this year. Going forward, click-to-message powered by AI will become a greater percentage of revenue, potentially reaching 15% of sales in the full year 2025.


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