Source: PaxForex Premium Analytics Portal, Fundamental Insight
Shares of Meta Platforms have experienced a remarkable surge in 2023, more than doubling in value. Despite this significant increase, there is still an opportunity for investors to consider purchasing the stock.
Several factors suggest that Meta's shares may continue to rise in the long term, despite their recent strong performance. Following a challenging 2022, Meta appears to be on track to accelerate revenue growth and enhance profitability.
Here are three compelling reasons for investors to contemplate adding Meta shares to their portfolio.
- The year of efficiency will result in reduced operating expenses
Meta has adjusted its 2023 expense projections, aiming to decrease them by approximately $9 billion at the midpoint of its guidance. This reduction not only paves the way for increased profitability but also establishes a lower baseline for operating expenses in future years.
To provide some context, Meta generated around $29 billion in operating income in 2022, while its operating expenses for the year totaled nearly $88 billion.
According to the latest outlook from Meta's management, operating expenses are expected to be approximately $88 billion again in 2023. However, Meta is beginning to experience revenue growth once more, with a 3% increase in the first quarter, and management has provided guidance for approximately 7% revenue growth in the second quarter. This growth is likely to generate significant leverage for Meta's bottom line.
It is important to mention that Meta Platforms expects its Reality Labs division to incur a higher operating loss in 2023. However, starting from 2024 and onwards, the company intends to manage its operating expenses in a way that demonstrates an improved operating margin for its metaverse business.
By maintaining stable operating expenses in 2023, Meta is compensating for the year of stagnant revenue it encountered in 2022. Moving forward, the company should be able to continue its trajectory towards enhanced operating margins for the entire business, rather than resetting closer to the significant decline in operating efficiency witnessed in 2022.
- The monetization of Reels is steadily improving
Despite Reels contributing significantly to engagement on Instagram and Facebook, its impact on overall monetization has been limited.
Currently, Meta does not monetize time spent on Reels to the same extent as its Feed or Stories products. However, management anticipates that by the end of the year, the overall effect of Reels on monetization will be neutral. This means that the increased time spent on Reels will fully compensate for the lower monetization rate. The company has been actively working towards achieving this goal since the beginning of the year.
Significant progress has already been made. Last quarter, Reels' ad load increased by 17%, surpassing the 16% growth in Q1, as reported by Citi analysts. Not only is the ad load increasing, but Meta is also continuously enhancing its artificial intelligence capabilities, resulting in improved recommendations and performance tracking for advertisers. These innovations not only enhance the value of Reels ads but also attract new advertisers to the format.
Looking ahead to 2024 and beyond, Reels is expected to contribute positively to Meta's overall advertising business as the company aligns the monetization levels of Reels with that of its Feed and Stories products.
- Meta is well-positioned to benefit from favorable secular trends once again
In 2022, economic uncertainty led to a decline in advertising spending, affecting companies like Meta. Additionally, changes implemented by Apple, which limited user tracking across apps in iOS, had a negative impact on digital advertisers. Consequently, Meta experienced its first-ever revenue decline last year.
However, as we have now surpassed the impact of Apple's changes, marketers are starting to increase their spending on digital advertising once more. According to Standard Media Index, both April and May witnessed year-over-year increases in digital advertising expenditure, following consistent declines over the past two quarters.
This is a promising sign for Meta and raises the possibility that the company may surpass revenue expectations in Q2. Moreover, it sets Meta on a path of robust revenue growth for the coming years as digital advertising continues to claim a larger share of ad spending compared to traditional media.
When combined with the improved monetization of Reels and the reset operating expenses, Meta's profit potential remains strong. Despite the stock's recent surge, shares are currently trading at an enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) ratio below 20. Given the significant potential for meaningful revenue growth and substantial expansion of operating margins in 2024, this appears to be a reasonable price to pay for shares at present.
As long as the price is above 275.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 297.91
- Take Profit 1: 310.00
- Take Profit 2: 325.00
Alternative scenario:
If the level of 275.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 275.00
- Take Profit 1: 262.00
- Take Profit 2: 250.00
