Meta | Q1-24 Earning & Call review
We had Meta's earnings last week which I found very convincing. The stock market didn't agree with me as the ticket is down -8.5% at Friday's close - was down -15% on the earning day.
I decided to start a position at $424.5.
Overview. No need to introduce Meta.
EPS: $4.32 | $4.71 | +9.03% beat
Revenue: $36.16B | $36.46B | +0.82% beat
$15B of buyback & $1.27B of dividends.
Here are the most important metrics of the quarter before we comment on it all.
The takeaway is easy and rapid. Meta is growing & growing fast with revenues +27% YoY, net income +117% YoY which of course translates into strong EPS increase. And all this growth strictly comes from the business, nothing came from any one-time revenue or tax expenses.
Only. Business. Growth.
Business. First, the two metrics that matter the most for Meta - Active users & Revenue per User, as those are the two levers on their revenues.
Highest number ever of active users in their applications, ever. Which starts to be ridiculous with 40% of the planet using one of Meta's apps daily - I know that's not really true as it's not a 1:1 ratio, it's simply to illustrate that this is a big number.
ARPPU are a bit down QoQ, entirely normal due to seasonality - it's hard to beat the Christmas period when your business is advertising. Up 18% YoY is the data which matters.
So yeah, as said. Business is booming.
"All regions saw improved pricing growth due to stronger ad demand and ad performance improvements."
This is confirmed by some more numbers and mostly due to Meta's new AI tools.
What does this mean? It means that publishing ads on their platform is getting more and more expensive. Why? A combination of a growing user base & better tools to reach the proper targets - that's you. We confirm this here.
Ads are converting more than ever before.
"One thing I'd share, for example, is that we actually grew conversions at a faster rate than we grew impressions over the course of this quarter."
Keep in mind that those are YoY growth numbers, so sure, the growth is slower, but it also is based on a bigger number - Like, take $100 and grow it 25%, if you grow this 15% afterward, you're still much above $125. Hope I make sense.
Everything here is screaming that the business is strong. Growing user base, better conversion, growing pricing for advertisers & new AI tools more & more demanded by advertisers.
"revenue flowing through [Advantage+ Shopping and Advantage+ App Campaigns] has more than doubled since last year."
Revenues. We've seen it already, they're simply great.
Expenses only grew +5.6% YoY. That's a +116% growth in income which shows a strong & growing business and a very tight cost management. Growing revenue while maintaining costs flat is just a proof of dominance and pricing power. And they plan to continue.
"we will also continue to carefully manage headcount and other expense growth throughout the company."
All while having one of the strongest balance sheets & Cash Flows I have seen. Sitting on a net debt of $40B and OpCF of $19.25B.
If you need me to translate: They have & make so much money they don't know what to do with it anymore. Which brings us to our main subject and what annoyed the market and probably triggered that -15% drop.
Reality Labs. I'll use a word I saw a lot in $TSLA reports which made me crazy (because it's stupid). $META lost $3.8B + $6.715B on Reality Labs this quarter, more than $45B in total.
Yes, I did include Capex here although it counts AI investments but you get the gist, they lost so much money!
So no. Just. No. This isn't losing money, this is investing, this is how innovation happens. You burn cash to create products and services. Some might not like it, it's fine, but no one can say "they lost money". They invest in the company's future and they plan to continue.
"We'll still grow our investment envelope meaningfully before we make much revenue from some of these new products."
Some context is necessary though, $META could burn $15B per quarter without it being an issue for their financial health. The amount burnt in Reality Labs for years is equal to their actual net debt. Or to less than a year of income.
I don't see it as significant and I don't see it as an issue. I do not want to see such a profitable company sit on its hands and do nothing anymore but buybacks & dividends just to please some passive investors - rings a bell?
Innovation matters.
And Mark said it best during the call, history should teach us to trust this mangement.
"Historically, investing to build these new scaled experiences in our apps has been a very good long term investment for us and for investors who have stuck with us [...] we have a strong track record of monetizing them effectively."
Guidance. And if the spending wasn't enough, the guidance dropped the hammer.
Meta wants to burn more and more cash in innovation but to control those expenses and still plan to return tons of cash to shareholders. With a middle double-digit growth.
What the market read was "operating losses to increase meaningfully".
Earning Call. There are more points in the call that should be highlighted here.
Video & Reels. We had tons of information on how reels & longer videos are attracting more users and attention over the last quarters on the different apps.
"On Instagram, Reels and video continue to drive engagement, with Reels alone now making up 50% of the time that’s spent within the app."
Monetization for those contents took time and the team is still focusing on it but things are getting better and results are showing.
"So Reels revenue continued to grow across Instagram and Facebook in Q1, and that's driven both by higher engagement and increased monetization efficiency through our ad ranking and delivery improvements."
It raises a very interesting question about TikTok and the recent U.S lawsuit against the app. What's gonna happen to the Chinese social media platform & how will Meta play this?
I'd say it'll be good for them although they didn't really comment on it.
Language Models. The new Llama 3 AI assistant which Mark believes to be "the most intelligent AI assistant that you can freely use." I'm not sure how he considers ChatGPT but I'd be curious to test both and see how they compete.
Already capable of doing lots of things.
"Meta AI now creates animations from still images, and now generates high quality images so fast that it can create and update them as you're typing, which is pretty awesome."
I personally have seen lots of issues from content creators' content being "stolen" and fed to users without any credits nor compensations. Very curious of how this kind of things will unfold in the future, legally and financially, but this is a situation that has to be addressed.
Besides this negative point, Meta partnered with Google & Microsoft to help on their live data, a very good strategy as it'd allow users to do internet researches without leaving Meta's app.
What do you think would happen if most could search with AI from Instagram? I'd say hours spent on the platform would skyrocket. But not only as Meta apparently intends to monetize it differently.
"I think this will end up being a pretty different business."
Too early to say though.
Innovation. Meta understood the importance of renewing its products & services and the team doesn't want to follow Apple's footsteps - Second free criticism here. The management plans to keep investing massively both in AI & Reality Labs - although expenses in one directly help the other.
"One strategy dynamic that I've been reflecting on is that an increasing amount of our Reality Labs work is going towards serving our AI efforts."
This is a good thing. But innovation isn't only services, it's also infrastructure which will need tons of spending to have decent material for AI products.
"we expect that we will invest significantly more in infrastructure over the coming years."
Quest headset. There's an entire talk about the Quest headset and how the team is planning to develop different models for different activities.
"For example, a work-focused headset may be slightly less designed for motion but may want to be lighter by connecting to your laptop. A fitness-focused headset may be lighter with sweat-wicking materials..."
You get the idea. I'm not a big fan as I think headsets still didn't find their customers - we had confirmation with the Vision Pro. I still like the optimism and wish to innovate and create different products. I like the vision.
It's also important to note that sells grew +30% YoY.
Conclusion. To me, this quarter was nothing but excellent and even gave me the opportunity to start a position, which I will certainly grow over time if the stock sticks at those valuations.
The market is scared of those spendings and might not trust Meta to convert them into future revenues. Or that it will take them too long to do so.
I see nothing but financial health, business & revenue growth, perfect execution & a wish to innovate. Yes, innovation comes through spending, but once new services will scale enough, we can trust Meta to find ways to monetize them.
That's how they work. And it did good for them. I'll end this report on a comment from Susan which sums it up pretty well.
"We expect to pursue these opportunities while maintaining a focus on operating discipline, and believe our strong financial position will allow us to support these investments while also returning capital to shareholders through share repurchases and dividends."
I do trust them & I'm in their boat.
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