Meta's stellar quarter shows Zuckerberg can both monetize and cut costs

Published Wed, Jul 26 20238:05 PM EDTUpdated Thu, Jul 27 202312:04 PM EDT

Meta Platforms (META) delivered a much better-than-expected second quarter Wednesday, with its robust revenue guidance for the current period further proof the social media giant has made incredible strides monetizing its products even while reining in costs. Revenue for the three months ended June 30 climbed 11% year-over-year, to $32 billion, beating analysts' forecasts of $31.12 billion, according to Refinitiv. Earnings-per-share (EPS) grew 21% year-over-year, to $2.98, exceeding Wall Street's estimates of $2.91 a share, Refinitiv data showed. The beat would have been even bigger excluding a $780-million restructuring charge. Shares of Club holding Meta jumped roughly 7% in afterhours trading, to nearly $319 apiece, adding to a rebound that has seen the stock soar 148% year-to-date. Bottom line The parent company of Facebook and Instagram may have faced the highest bar out of all the "Magnificent Seven" technology stocks heading into second-quarter earnings season, due mainly to its significant outperformance this year. But the company delivered on those lofty expectations with a quarter that was the best among the group so far. The other members of that cohort have reported so far are Club names Alphabet (GOOGL) and Microsoft (MSFT), as well as Tesla (TSLA). Meta had seen its stock price and earnings decimated last year due to out-of-control expenses, a weak advertising market, and ongoing monetization challenges amid privacy challenges with Apple's operating system . And one by one, these problems have been alleviated throughout 2023. CEO Mark Zuckerberg's declaration in February that this year would be the company's "year of efficiency" transformed Meta's narrative. Investors quickly came to see the tech firm as serious about cost-optimization and achieving more with less headcount, rather than a Silicon Valley player burning through cash. While the ad market remains challenged, higher engagement, more time spent on Meta's family of applications, and the use of artificial intelligence has led to a 34% surge in the total number of ad impressions — essentially the number of times an ad is displayed on an ap. Meta's use of AI has also helped it navigate Apple's privacy changes for apps, while obtaining better results for advertisers. Taken together, the company has been able to significantly accelerate revenue growth. Coupled with rebounding operating margins, the stock is now more deserving of a so-called growth stock multiple instead of the "value" label investors had attached to the firm last year. With earnings estimates moving higher, we raise our price target to $350 a share, up from $250. Second-quarter commentary Strong platform engagement and improved monetization were the two big themes of the quarter. Meta now has more than 3.8 billion people who use one of its apps every month. Facebook was a standout in the quarter, with the number of daily and monthly active users both beating expectations. That was largely a result of a rise in active users from the U.S. and Canada, an important combined market due to its high average-revenue-per-user (ARPU) monetization rates. Driving these trends is the adoption of artificial intelligence, which not only improves recommendation systems — which show users content they are likely to be interested in — and engagement, but also monetization. Zuckerberg said Wednesday that AI-recommended content from accounts that a user doesn't follow is now the fastest-growing category of content on Facebook's feed. It's a bit of a copy from rival Tik-Tok's playbook, but the shift has been worth it because time spent on the Facebook platform is up 7% since the introduction of these monetization efforts. We can't talk about AI-recommend content without mentioning the Reels short-form video offering, which continues to be a major success story. Reels' plays now exceed 200 billion per day across Facebook and Instagram. But Reels isn't only getting more eyeballs, it's making a lot more money. The annual revenue run-rate of Reels across both social-media apps now exceeds $10 billion, up from $3 billion last fall. Back in May, Meta shared details about how it uses AI to improve the performance of ads for businesses, along with new features for its Meta Advantage suite of ad-automation tools. Meta CFO Susan Li on Tuesday said the company is leveraging AI to "move our systems towards using fewer larger models that enable us to leverage learnings across product surfaces and deploy improvements more quickly, broadly and efficiently." She added that Meta is also harnessing AI "to power advanced ads products like Advantage+ shopping, which continues to gain adoption," noting those efforts have "translated into results for advertisers." While Meta has this year become a story centered around AI-driven efficiency and improving monetization, Zuckerberg made clear Tuesday that he is still "fully committed" to the so-called metaverse through the work the company is doing in its Reality Labs segment. There's still plenty of investor angst about how much money this segment is losing every quarter, along with the limited visibility into when it will ever turn a profit. But for now, Zuckerberg has a pass because, to his credit, Meta's cost structure has been reduced significantly this year. It's also lot easier to stomach the high losses at Reality Labs when the company is in a position of strength and back to printing money. Meta generated more than $10 billion worth of free cash flow in the second quarter. Elsewhere, Meta is optimistic about the initial trajectory of its nascent Threads app , the platform the company launched earlier this month to rival Elon Musk's Twitter. The large uptake by users has made it a bigger opportunity than Zuckerberg anticipated, he acknowledged Tuesday. But don't expect plans to monetize the app any time soon. The company will focus on retention and the basics before that conversation begins, he suggested. Lastly, Meta slowed the pace of share buybacks. After buying back $9.22 billion worth of stock in the first quarter, Meta only repurchased $793 million in the second quarter. But this isn't necessarily alarming, given the stock has risen from the ashes this year, gaining hundreds of billions in market value. Still, the company has plenty of fire power to buy back stock if it wants to. It had $40.91 billion available and authorized for repurchases as of June 30. Outlook Meta's third-quarter revenue guidance is what really pushed the stock higher in late-market trading Wednesday. The company said it expects revenue to be in the range of $32 billion to $34.5 billion, reflecting growth of about 20% year-over-year at the midpoint. This view is much stronger than the $31.2 billion consensus forecast and a sharp acceleration from the 11% growth rate seen in the second quarter. The strong guidance was likely made possible due to easing foreign-exchange headwinds, along with stabilization in demand, easy year-over-year comparisons, and improvements to monetization and engagement. On the expenses side, Meta now sees full-year total expenses in a range of $88 billion to $91 billion, up from a prior view of $86 billion to $90 billion. Still, Meta continues to expect Reality Labs' operating losses to increase year-over-year in 2023. Meanwhile, management lowered its full-year outlook for capital expenditures to be in a range of $27 billion to $30 billion, below Wall Street's estimates of $31 billion. The company took the range down $3 billion due to cost savings, particularly on non-AI servers, as well as shifts in capital expenditures into 2024 from delays in projects and equipment deliveries. It's not from a reduction in overall investment plans. Meta expects capital expenditures to grow in 2024, as it invests in both data centers and servers to support AI work. Looking out to 2024, Meta outlined three factors that will drive total expenses growth in 2024. The first is higher infrastructure-related costs next year. The second is growth in payroll expenses, as the company evolves its workforce compensation toward higher-cost technical rolls. And the third is an expectation that operating losses from Reality Labs will increase meaningfully on 2023 levels — disappointing news amid an otherwise stellar quarter. (Jim Cramer's Charitable Trust is long META, MSFT, GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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This photo illustration created in Washington, DC, on July 5, 2023, shows the logos for Threads, an Instagram app, and Instagram.

Stefani Reynolds | AFP | Getty Images