Tuesday, April 16, 2024

Meta Soars: Stock a Buy After Stellar Earnings & AI Push?

HomeStock-MarketMeta Soars: Stock a Buy After Stellar Earnings & AI Push?

SAN FRANCISCO – After a disastrous 2022, Mark Zuckerberg and his company Meta Platforms had a remarkable turnaround in 2023. Meta, the parent firm of Facebook, Instagram and WhatsApp, saw its stock price nearly triple as cost cuts and a return to revenue growth reinvigorated the struggling social media behemoth.

But as Meta puts last year’s challenges behind it, the tech giant is making an ambitious push into generative artificial intelligence – a frontier that both holds huge potential and massive financial risks. Can Meta establish itself as an AI leader alongside tech titans like Microsoft and Google? Or will Zuckerberg’s next big bet result in more headaches for the company?

Meta’s 2022 Woes

To understand Meta’s current resurgence, we first have to revisit the company’s troubles that rocked 2022. Challenges abounded for the Facebook parent company that year on multiple fronts:

First, there was fallout from Apple’s privacy changes in 2021 that made it harder for apps to track user activity and target ads. This hit Meta hard since nearly all of the company’s revenue comes from digital advertising. Meta’s sales declined slightly in 2022 versus the prior year.

Secondly, Meta was being squeezed by rising costs – especially for the company’s big investment in building the “metaverse,” an immersive virtual reality world. The metaverse project, called Reality Labs, lost over $10 billion in 2022. Meta’s total expenses that year soared 25%.

Thirdly, economic storm clouds were forming with red-hot inflation and rising interest rates. Companies tend to spend less on advertising amidst a weakening economy – a major risk for Meta’s advertising-dependent business model.

Lastly, competition in the social media landscape only intensified. Newer apps like TikTok were luring away younger users from Facebook and Instagram. Meta was quickly looking like a company stuck in the past.

All of these compounding factors caused Meta’s stock price to plummet 64% in 2022. Employee layoffs, cost cuts and “product prioritization” quickly became Zuckerberg’s new mantras. It was a stunning fall from grace for one of the world’s most dominant technology companies.

The Big 2023 Rebound

But Meta proved the naysayers wrong in 2023 with a remarkable comeback. Despite the economic headwinds, the company benefited from a recovering digital ad market. More importantly, Meta’s own cost discipline efforts paid major dividends.

Zuckerberg declared 2023 as the “Year of Efficiency” with over 20,000 job cuts and other expense reductions. The slimmed down operations, combined with higher ad revenue, drove Meta’s earnings up an incredible 73% year-over-year in 2023 to $14.87 per share.

Wall Street took notice and bid Meta’s stock price up nearly 200% over the course of 2023. The once-beleaguered company’s market value soared back above the $1 trillion level in January 2024, joining the elite ranks of Microsoft, Apple, Nvidia, Alphabet and Amazon as just the sixth U.S. company ever to achieve a $1 trillion-plus market capitalization.

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The stunning reversal was further punctuated by Meta’s announcement in early 2024 that it would initiate its first-ever dividend payment to shareholders – a 50 cent per share quarterly dividend that will cost the company $10 billion annually.

“Being a leaner and more disciplined company is helping us execute better and faster,” Zuckerberg told investors on Meta’s Q4 2023 earnings call. “We have the winds at our back heading into 2024 and beyond.”

AI Emerges As Next Big Priority

So with Meta’s core advertising business stabilized, at least for now, the company has turned its sights to the next frontier: generative artificial intelligence.

AI has quickly emerged as one of the hottest topics in the technology world over the past year. Generative AI systems like ChatGPT can engage in human-like dialogue, answer questions, write essays and even code software. The potential real-world applications seem limitless across industries.

Recognizing AI’s massive potential, many of the world’s biggest tech firms have gone all-in. Microsoft announced a multi-billion dollar investment in ChatGPT-maker OpenAI. Google launched its own conversational AI called Bard, playing catch up to Microsoft. And chipmaker Nvidia has emerged as a key enabler, with its high-powered processors acting as the “brains” to train AI models.

Not wanting to be left behind, Meta too is rising to the AI challenge. The company has been training its own large language model called Llama that operates similarly to ChatGPT. Meta has also launched its own collection of AI chatbots with distinct personalities to enable more engaging conversations.

Zuckerberg recently announced plans for Meta to spend billions of dollars on new Nvidia computing chips, part of an “massive” AI infrastructure build-out in the years ahead. “Our long-term vision is to build artificial general intelligence, open source it responsibly and make it widely available for everyone to benefit,” Zuckerberg stated.

Currently, Meta’s consumer-focused AI push is centered around driving higher engagement across Facebook, Instagram and WhatsApp. AI-powered chatbots, recommendation algorithms and other AI-assisted features aim to make Meta’s suite of apps “stickier” and more user-friendly.

“Whenever there’s more engagement on our apps, that creates the opportunity for more monetization and relevant ads down the line,” explained Zuckerberg.

Additionally, analysts believe generative AI models could significantly enhance Meta’s advertising technology stack, leading to more relevant and personalized marketing for brands.

But beyond consumer applications, Meta wants a seat at the AI supercomputing table alongside Microsoft, Google and others for powering advanced AI research and services. The big tech companies are essentially in an AI arms race to build the most powerful infrastructure possible.

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“Two emerging technologies – AI and the metaverse – represent Meta’s biggest long-term bets on the future,” stated Andrew Bosworth, Meta’s Chief Technology Officer. “We are diving head-first into both areas.”

The AI Profit Gamble

Still, Meta’s full-fledged assault into artificial intelligence is not without major risks. For one, the capital expenditure requirements could prove monumental.

On top of plans to purchase billions of dollars worth of AI processors from Nvidia, Meta recently raised the high end of its broader 2024 capital expenditure guidance to a staggering $37 billion – up from $32.4 billion in 2023.

The mounting AI expenses come even as Meta’s core digital advertising business faces potential softness in 2024 from an economic downturn. Analysts currently project Meta’s revenue will grow 17% this year to $158 billion. That’s solid, but down from nearly 25% growth in Q4 2023.

“Meta must walk a tightrope of investing aggressively to remain an AI leader while also preserving profit margins that have recovered nicely,” says Dan Ives, senior equity analyst at Wedbush Securities. “They have little room for error on either front.”

History suggests investors will punish Meta if it overspends wildly on speculative tech bets that don’t produce returns quickly enough. Just look at the overhang from the billions lost so far on the metaverse project, which still shows little tangible progress.

The other big wild card: Will Meta’s AI strategy resonate with consumers and businesses? While ChatGPT’s viral success proves there is demand, the AI market remains nascent with an unclear path to monetization. Selling advanced AI cloud services could be an uphill battle versus entrenched players like Microsoft, Google and Amazon Web Services.

Can Meta avoid its previous missteps of being too arrogant and out-of-touch with user preferences? Time will tell if Zuckerberg’s multi-billion dollar AI gambit pays off.

Return To Social Media Dominance

Despite the AI uncertainties, Meta’s position atop the social media hierarchy looks secure for now. The combined global users of Facebook, Instagram and WhatsApp easily top 4 billion monthly actives. No other social platform comes close.

Facebook alone still has over 3 billion logged-in users checking the app daily or monthly. Instagram’s 1 billion-plus user base makes it one of the most popular apps for younger demographics. WhatsApp dominates the mobile messenger landscape with 2 billion users.

The scale and robust engagement across Meta’s “Family of Apps” remains the company’s biggest asset. It allows Meta to generate over $150 billion in annual advertising revenue, dwarfing competitors. Research firm eMarketer projects Meta will capture nearly 22% of the total U.S. digital ad market in 2024.

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“Meta’s business bounce-back in 2023 should not be overlooked or underestimated,” says Tom Forte, senior research analyst at D.A. Davidson. “Their social media properties are deeply embedded into the daily digital routines of billions worldwide. It’s very difficult to displace that kind of dominance.”

Apple Rivalry Intensifies

That said, Meta isn’t entirely without rivals gunning for its social media throne. The company’s animosity with Apple remains as intense as ever.

Back in 2021, Apple implemented new data privacy policies that severely hampered Meta’s ability to track users across websites and apps for targeted advertising purposes. Meta claims Apple’s moves delivered a multi-billion dollar revenue hit.

The feuding giants recently sparred over another policy when Apple announced it would take a 30% cut from businesses that use Meta’s tools to “boost” posts and go viral. Meta contends boosting posts should be classified as advertising, which Apple does not tax. Meta now encourages business partners to bypass the Apple tax by boosting posts through web browsers instead of mobile apps.

The simmering tensions reached a new level when Apple unveiled its Vision Pro virtual reality headset in early 2024. The $3,500 premium mixed reality device marks Apple’s first major push into the metaverse concept that Meta has been chasing for years.

In an unusual marketing move, Zuckerberg posted a video review disparaging Apple’s Vision Pro headset as overpriced and lacking metaverse capabilities compared to Meta’s own Quest VR headgear.

“After using Vision Pro, I don’t just think Quest is the better value. I think Quest is the better product, period,” Zuckerberg stated.

Undeterred, Apple CEO Tim Cook has made bold predictions that the Vision Pro will pioneer a new manner of spatial computing and communication as transformative as the original iPhone.

The charismatic tech leaders’ escalating shots at each other signal their products are on a collision course. As Apple and Meta duke it out between the metaverse, AI and digital advertising, they are shaping up as the tech world’s next great rivalry.

For now though, Meta stands alone atop the social media pyramid as a $1 trillion juggernaut. 2022’s struggles feel like a distant memory as the company powers forward under Zuckerberg’s latest AI-infused vision. But can the Facebook founder’s big AI bets pay off? Or will excessive risk-taking sidetrack Meta’s hard-fought comeback? The future trajectory of one of the world’s most influential companies hangs in the balance.

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Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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