Meta Platforms, Inc. (NASDAQ:META)
The remarkable rally in Meta Platforms, Inc. (NASDAQ:META) stock that began in November 2022 has slowed. Investors who followed its post-earnings increase undoubtedly saw articles praising CEO Mark Zuckerberg and his team’s “year of efficiency” and were impressed.
Although Facebook’s library of apps is expanding, investors should be aware that Meta Platforms is unlikely to be a growth company going ahead. The increased interaction brought about by Reels pushed its FoA’s DAP to 2.96B, an increase of 0.24% quarter over quarter.
We anticipate it will become more difficult to sustain DAP growth when Meta’s DAP approaches $3 billion. “primarily in Asia and [the] rest of the globe, which does not monetize effectively,” as Facebook’s major growth driver has been described.
As the company’s growth has slowed significantly, it needs to depend more on interaction to achieve revenue, which presents some structural issues.
Hence, the business has prioritized user interaction due to signal loss difficulties from Apple’s ATT and the additional pressure of TikTok’s competitive headwinds.
A post by Stratechery’s Ben Thompson noted, “Facebook has improved engagement by having consumers spend more time on Reels and increased ad load by introducing more ad spots.”
This boost in discovery may be attributed in part to the company’s increased ad load and its usage of its AI stack. Ad impressions increased by 23% year-over-year in FQ4, offsetting the 22% drop in ad pricing.
This proved that businesses have used Facebook’s reduced ad rates to increase their views. If this is the case, the gloomy hypothesis that FoA’s portfolio would lose many of its advertisers is untrue.
Tigress Financial Partners pointed out that Meta “could monetize its family of applications and future product releases,” combining AI with Facebook’s social network. Meta’s large number of DAP users gives it considerable clout in the market for online advertising.
Because of this, Facebook’s competitive moat has been significantly bolstered by AI, and additional expenditures are warranted. As digital display advertising moves from deterministic to probabilistic, Meta will be best positioned with considerable resources to employ AI.
Even Meta will likely have a different rapid expansion than before the epidemic.
Reality Laboratories at Meta is expected to continue to bleed resources as the business competes with YouTube and TikTok for leadership in short-form video content while having a considerably worse profitability profile through FY25.
In addition, TikTok’s continued market expansion is “a threat to rivals” because of the company’s propensity to set relatively low cost-per-thousand (CPM). As the company’s growth has slowed significantly lately, it has increased its speed to share more income with its creators.
TikTok poses a danger to Meta and might affect its ability to maintain its hold on the wider digital ad sector due to its aggression in a social media area with fundamentally slower growth.
Should investors, therefore, despite the challenges above, dive headfirst into the resurgence powered by Zuckerberg’s “year of efficiency,” especially given the media’s rapid turnaround from extreme pessimism to extreme optimism over only three months?
As a result of its extraordinary growth, META’s valuation is now comparable to that of its competitors (NTM EBITDA: 8.1x vs. 8.9x median) (according to S&P Cap IQ data).
As a result of structural barriers, ongoing expenditure in the metaverse, and competitive headwinds, we anticipate that market operators will be hesitant to re-rate META higher in light of the anticipated slowing of Meta’s growth.
In addition, the price of META has hit bottom as its mean-reversion price action from its prior capitulation reaches a threshold.
As was previously mentioned, the post-earnings rally in META has stopped. Bottom-fishers have taken advantage of the uptick in the last three months to reduce risk.
Investors who read our post from November 2022, in which we claimed that a “mean-reversion opportunity has presented itself,” should thus remove some risk from their portfolios, in our opinion.
Featured Image: Unsplash @ Muhammad Asyfaul
