Bears Could Be Trapped By Meta Turnaround

The Wall Street Journal report last week suggests that many of Meta's specific issues are being addressed. The company is using artificial-intelligence tools to adapt to Apple's privacy changes, the Journal's report shows, enabling it to make better predictions based on less data. The investments that Facebook and Instagram made seem to be paying off. According to a report from the Wall Street Journal, the two platforms are seeing a 20% increase in the amount of time users are spending on Reels, thanks in part to improvements in artificial intelligence.

January 31, 2023

5 minutes

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This week, investors may want to ignore platforms' quarterly earnings reports. Meta will report fourth-quarter earnings Wednesday afternoon, after Snap reports its earnings Tuesday afternoon.

Meta had a very poor year in 2022, with its share price declining by 64%. This loss of value amounts to around $600 billion.

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The bear case for Meta has been based on more than just the general slowdown in advertising that has also affected Snapchat's parent company. Competition from video-first platforms like TikTok is heating up, while user growth on Meta's legacy "Blue" Facebook platform seems to be plateauing. Skeptics regard the pivot to the metaverse as a far-fetched moonshot project that is receiving too much of Meta's investment dollars. And despite its massive size and scope, Meta's ad business doesn't seem to be bouncing back from Apple's tracking changes as quickly as hoped.

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There is still debate on whether the advertising industry is finally starting to improve. However, for Meta, the short-term outlook for ad spending may not be all that important. First of all, the expectations are not high: Wall Street is predicting that Meta's revenue will drop by more than 6% from the previous year during the fourth quarter—this would be the biggest decline on record. Analysts are not expecting any growth until the second quarter of this year.

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Meanwhile, a Wall Street Journal report last week suggests that many of Meta's specific issues are being addressed. The company is using artificial-intelligence tools to adapt to Apple's privacy changes, the Journal's report shows, enabling it to make better predictions based on less data. The report also shows how Meta is shifting to forms of advertising less dependent on harvesting external user data, which Apple's recent privacy changes have restricted. Executives told employees in October that Meta could begin rebounding from Apple's changes as soon as the fourth quarter, according to the Journal's report.

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Meta is currently generating only 18% of its revenue from ads based on first-party data. This means that the company is relying heavily on external sources of data, rather than data derived from its own platforms. According to internal estimates, this could equate to $21 billion in revenue by 2026. Meta is therefore focusing on investing in new ad formats, such as click-to-message ads, which could generate an additional $18-25 billion in revenue. Baird analyst Colin Sebastian estimates that click-to-message ads could generate nearly $12 billion in revenue this year, equivalent to 2.5 Twitters.

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Meta's plans to spend billions of dollars on what would be a "metaverse first, not Facebook first" future may have spooked investors. However, as the Journal reported, most of the company's AI targeting efforts involve optimizing its traditional social-media platforms, especially Facebook. This fits with Meta's December blog post that the company is, in fact, still devoting 80% of its total investment dollars to improving its legacy business.

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The investments that Facebook and Instagram made seem to be paying off. According to a report from the Wall Street Journal, the two platforms are seeing a 20% increase in the amount of time users are spending on Reels, thanks in part to improvements in artificial intelligence. TikTok's threat, meanwhile, may be starting to fade. According to a report from Reuters, the platform saw its revenue growth slow significantly last year. And a new bill introduced in the Senate this month is seeking to ban the app from all devices nationwide.

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Meta's shares have been on the rise this year, and this trend looks set to continue. Wall Street analysts are taking note of the company's positive momentum, with UBS and Jefferies both forecasting strong results in the fourth quarter. Bernstein is predicting that Meta will outperform the broader online ad space this year, thanks to the company's strong position in the market.

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Snap's results have been a popular indicator for investors trying to bet on Meta. Meta's stock has been volatile recently, and Snap's results may give some insight into the company's future performance.