The Meta Platforms share price has almost doubled this year, up 92%, after the Facebook owner saw its market capitalisation improve by almost 15% after it posted impressive Q1 results. The social media giant is up 164% since last October, making it the best performing major large-cap stock in the world over the past several months.
Meta’s redemption comes after a brutal period that saw the company’s share price lose three quarters of its value between a record high in September 2021 and the recent low of October 2022. Investors deserted the social media company, which also owns Instagram and WhatsApp, as growth slowed, especially for Facebook.
User engagement was dropping, and younger generations shunning the platform in favour of new competitors like TikTok. Apple also changed its privacy policy to make it harder for social media advertisers to track users across apps on its devices. That tracking allows them to be more effectively targeted based on online behaviour and advertisers spend less on less effective adversing and iPhone and other Apple device users are seen as an important demographic – one with plenty of disposable income.
At the same time, growth stocks were being more generally battered by rising interest rates and negative market sentiment. And a tough macroeconomic environment raised concerns for the digital advertising market from which Meta makes most of its money.
Meta’s co-founder and chief executive Mark Zuckerberg also went all-in on the hazy prospect of the ‘metaverse’ becoming the company’s future growth catalyst, changing the company’s name and investing billions in R&D. The problem is the metaverse, a loosely defined new digital era framed by AR and VR technology, doesn’t yet really exist in any meaningful way.
What does exist, mainly glorified VR chat rooms populated by the avatars of users wearing VR headsets, is populated by a relatively small number of early adopters. It’s not yet clear what a more mature metaverse will look like, how popular it will be and what the digital ecosystem’s business models will be.
With Meta’s CEO staking the company’s future on the metaverse amid declining fortunes and an uncertain future for its “traditional” social media assets, and an economic storm whipping up, it’s perhaps not surprising the company’s share price took a hit.
But that begs the question of why Meta has now had such an upturn in its fortunes recently, at least for its market capitalisation, and what has investors believing again. Is Meta back and does it offer more share price upside over the remainder of 2023 and beyond?
Or is the recent recovery simply investors returning to what they’ve known and benefitted from for the past decade? And a temporary reprieve before decline sets in again as Facebook trudges towards irrelevance and Meta’s cash cow starts to run dry long before the metaverse is ready to step up to replace it. If it ever will?
Investors have reacted positively to Meta’s performance over the first three month of 2023
Meta Platforms investors have sent the company’s valuation up by over 13% this week after being impressed by the company’s strong bounce back from a tough 2022 over the first three months of the year.
After seeing its first ever net decline in active monthly users during the second quarter last year, Meta added 37 million new active users over the first quarter of 2023. That takes the total number of global users across Facebook, Instagram and WhatsApp to over 3 billion.
There was also year-on-year growth in revenue over the quarter, which rose 3% to $28.6 billion, ahead of analysts expectations for $27.7 billion. Most crucially, the first quarter of 2022 that is being compared to was before Apple introduced its new privacy rules.
Zuckerberg told investors that much of this improvement can be attributed to the use of new AI algorithms that recommend content to users driving renewed levels of engagement. The CEO said that AI recommendations have increased average user time spent on Instagram by 24%.
AI has also underpinned the success of Facebook’s new TikTok-esque Reels feature, which servies short user-generated videos. Monetisation across Reels, an issue with the format despite its impressive engagement scores, improved 30% on Instagram and 40% on Facebook compared to the last quarter of 2022.
Zuckerberg also stressed that the company is still very much committed to the strategy of developing business models for the metaverse as the future driver of growth. He yesterday told investors:
“A narrative has developed that we’re somehow moving away from focusing on the Metaverse vision. So I just want to say upfront that, that’s not accurate”.
That’s something investors, many of whom are concerned about the vast sums being invested, will have had mixed emotions on. The metaverse business unit recorded an operational loss of $3.99 billion over the quarter, up from $2.96 billion.
Encouragingly, the company expects revenues to rise to between $29.5 billion and $32 billion for the next quarter. The bottom of that range would represent 2% year-on-year growth and the top a whopping 11%. Full-year capex is expected to remain stable at $30 billion to $33 billion with significant investment going into AI capabilities designed to further improve engagement and boost ad revenues.
Another $40 billion-worth of shares is to bought back by the company and it won a key antitrust battle when a judge in California threw out a lawsuit brought by the Federal Trade Commission to block Meta’s acquisition of Within, a maker of a popular virtual-reality fitness app.
Does the Meta share price retain upside despite recent gains?
Despite the recent positives for Meta, I am sceptical if investors that do not already have exposure to the stock should see gaining some at this stage as a priority. While a lot has started to go right at once for the company after a period where it seemed nothing would, there are still clouds on the horizon.
AI-optimisation of engagement levels not withstanding, it’s hard to see a long future of continued growth for any of Meta’s core existing assets of Facebook, Instagram and WhatsApp. That’s especially the case for the former which is increasingly seen by younger generations in key developed markets as a platform they associate with their parents and grandparents. If they have accounts, they are mainly to communicate with older family members and used little beyond that.
Meta believes it can still grow in developing markets but it faces a lot of competition from a new generation of social media apps. A big change in the competitive environment is also the recent international success of Chinese-owned apps, which are now serious rivals on the domestic market as well as in developing markets. American tech companies have much more competition than when Meta’s platforms rose to prominence.
The economic storm clouds haven’t passed and digital marketing budgets could be squeezed as the year progresses. How badly remains to be seen. Meta also remains under pressure from regulators. In the USA an FTC lawsuit is demanding its break and Europe is putting the finishing touches to tough new rules will be slapped on the biggest digital platforms.
But ultimately, it all rests on Zuckerberg and Facebook getting it right on the metaverse. Other big tech companies are also investing heavily in VR with Apple to release a headset, tacitly acknowledging the future potential of the metaverse Meta is all in on.
But it’s not only a question of whether VR and AR technology and platforms will play a big role in the future digital economy and our daily lives. And that it will be to the extent Zuckerberg and Meta believe is not a given. Meta also have to guess right when it comes to launching business models and products that will dominate the metaverse like Facebook and Instagram have dominated today’s social media market for over 15 years now.
With those questions still very much in play, while it’s far from impossible that Meta’s share price further improves this year, I would not be confident on the long term returns at today’s valuation. Not until there is more evidence that the metaverse play will pay off.
Other big tech options, especially Alphabet may represent better potential.
