Meta Platforms (NASDAQ:META) stock has rallied by more than 164% from its 52-week low, with its most recent quarterly report boasting remarkable achievements in all areas of the business.
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Despite the stock’s prolonged rally, Meta’s “Year of Efficiency” has only just begun. By prioritizing refinements in its core platforms, optimizing profitability, and abandoning past delusions surrounding the Metaverse, its financials should only improve throughout the rest of the year.
Consequently, the sentiment around Meta has completely transformed lately, with Wall Street expecting strong profitability advancements in the short-to-medium term. In fact, believe that the stock remains attractively priced against its future earnings growth estimates, despite the recent massive gains. Hence, I remain bullish on the stock.
User Engagement at All-Time Highs
Meta may already have over one-third of the global population using its family of apps on a monthly basis. Well, somehow, Facebook, Instagram, and WhatsApp are still drawing growing user engagement. In its Q1 results, the company celebrated a new milestone in terms of this, counting 2.99 billion monthly active users (MAUs) for Facebook, 2% more than the prior-year period, and family monthly active people (users across all platforms) of 3.81 billion, a 5% increase.
Despite numerous predictions of Facebook and Instagram’s impending demise due to factors such as user account deletions, the company keeps posting growing metrics by the quarter. This doesn’t just highlight the strength of Meta’s platforms but also underscores the immense power of the network effect that the company has cultivated.
Further, Meta’s focus on growing its Reels product to actively compete with TikTok has proven a fruitful choice and a major catalyst toward its success in user engagement. This is evident in Mark Zuckerberg’s comments during Meta’s earnings call, where he shared that Reels are being reshared more than 2 billion times every day, with reshares doubling over the past six months.
In my view, there is lots of room for Meta to grow through Reels, which could enable it to further compete with TikTok and YouTube Shorts. This is especially true considering the impressive advancements the company has made in integrating AI into its product. Unlike many companies that merely use AI as a buzzword to lure investors, Meta’s AI technology is already actively functioning. In fact, across Instagram’s platform, which is now predominantly dominated by Reels, an estimated 40% of the content you encounter is recommended by AI.
According to the company, the introduction of Reels has resulted in an impressive 24% increase in the amount of time people spend on Instagram. Additionally, the use of AI suggestions has improved monetization, with an efficiency increase of over 30% on Instagram and over 40% on Facebook on a quarter-over-quarter basis. These metrics have had a positive impact on Meta’s financial performance, as demonstrated by the company’s ability to maintain revenue growth of 3%.
Despite a 17% decline in average ad prices year-over-year, Meta was able to deliver a 26% increase in ad impressions across all of its apps. This, combined with a record user count, clearly indicates that users are more engaged than ever before.
Another interesting note here is that since Meta is currently delivering record ad impressions, with the top line growing by just 3% due to the ongoing headwinds in the advertising industry, revenues should snowball once global ad spending improves.
Cutting Costs to Drive Earnings Growth
Besides a promising revenue growth outlook driven by extreme strength in Meta’s core platforms, Meta is set to experience strong earnings growth moving forward as a result of its ongoing cost-cutting initiatives. This is not going to be too observable in the short term, as the company is going to take a notable hit from restructuring charges related to its recent layoffs.
In Q1, for instance, Meta was struck with extraordinary pre-tax restructuring charges of $621 million related to its last year’s layoffs. By the end of this year, the company expects to incur a total of $1 billion of pre-tax severance and related personnel costs (of which $523 million was recognized during Q1 2023). The heavy restructuring expenses weighed on profitability during the quarter, with earnings per share coming in at $2.20, 19% lower from the $2.72 seen in Q1 of 2022.
However, with less than half of this year’s total restructuring expenses remaining to be recognized throughout the year and revenue growth expected to accelerate for the reasons previously mentioned, analysts expect that earnings per share will still grow to $11.32 in Fiscal 2023. This implies year-over-year growth of 31.8%.
More importantly, with one-off restructuring expenses gone by next year and the company operating with a much leaner staff base, Wall Street expects that Meta’s earnings per share will grow by a further 23% in Fiscal 2024, reaching $13.93.
Is META Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Meta Platforms retains a Strong Buy consensus rating based on 40 Buys, five Holds, and two Sells assigned in the past three months. At $277.00, the average META stock price target implies 19% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell META stock, the most profitable analyst covering the stock (on a one-year timeframe) is Ralph Schackart from William Blair, with an average return of 29.71% per rating. See below.
The Takeaway
Mark Zuckerberg seems to be successfully shifting his focus from the Metaverse fantasies toward revitalizing the immensely lucrative advertising empire that the company’s core platforms comprise.
As Meta’s user base continues to grow and the performance of Reels remains consistently impressive, coupled with the anticipated recovery of the advertising industry from its current downturn, the company is poised to experience a substantial resurgence in revenue growth.
By incorporating Meta’s cost-saving measures and courageous stock repurchases, it becomes evident why Wall Street anticipates a tremendous increase in earnings per share over the next few years. To emphasize, the estimated earnings per share for Fiscal Year 2024, mentioned earlier, indicates that the stock is currently trading at a meager 16.8 times next year’s expected earnings (a 5.95% earnings yield). With the company’s present momentum and the modest earnings multiple, I feel like there is still more potential for the stock to march upwards. Hence I remain bullish on META stock.
