Meta gets a boost on Wall Street despite mixed results - but nobody mention Elon Musk!

Stuart Lauchlan Profile picture for user slauchlan April 28, 2022 Audio mode
Summary:
Meta's share price was up on a decidedly mixed quarterly report, but the brakes are being put on in several areas of the firm.

Facebook

Maybe it’s a side effect of Elon Musk’s social media ambitions, but Meta - aka The Company Formerly Known As Facebook - saw its share price soar yesterday despite some mixed results in its latest quarterly numbers.

It might, of course, just be that after the horror show that was its February financial report, investors went in with such low expectations that any sign of no increasing issues counted as a reason for celebration.

But it was a mixed bag. Monthly Active Users came in at 2.94 billion, below Wall Street expectations, while Daily Active Users were 1.96 billion, slightly above estimates. Total revenue was up 7% year-on-year to $27.91 billion, missing expectations and also the lowest growth rate to date. Profit of $7.47 billion was ahead of estimates, but down 21% year-on-year.

CEO Mark Zuckerberg was on hand to talk up “the near term challenges” impacting on the company:

Some are specific to Meta, like our transition to short-form video, which doesn't monetize as well for now, but which we're quite optimistic about over the long-term. Some are specific to our industry, like signal loss resulting from Apple's iOS changes, which is a meaningful headwind but we also expect that with the right technology investments, we'll navigate okay over time.

Other challenges are broader macro trends, like the softness in e-commerce after the acceleration we saw during the pandemic. The war in Ukraine, which is a real tragedy on a humanitarian level, has also had an impact on our business. We've been blocked in Russia and we decided to stop accepting ads from Russian advertisers globally. We've also seen effects on business globally following the start of the war.

Brakes on!

All of this means that the brakes are being put on some of Meta’s ambitions, he added:

After the start of COVID, the acceleration of e-commerce led to outsized revenue growth, but we're now seeing that trend back off. However, based on the strong revenue growth we saw in 2021, we kicked off a number of multi-year projects to accelerate some of our longer term investments, especially in our AI infrastructure, business platform, and Reality Labs. These investments are going to be important for our success and growth over time so I continue to believe we should see them through. But with our current business growth levels, we're now planning to slow the pace of some of our investments.

Reality Labs is particularly hit by this slowing down:

I recognize that it's expensive to build this. It's something that's never been built before and it's a new paradigm for computing and social connection. So over the next several years, our goal from a financial perspective is to generate sufficient operating income growth from our family of apps to fund the growth of investment in Reality Labs while still growing our overall profitability. Unfortunately, that's not going to happen in 2022 given the revenue headwinds, but longer term that is our goal and our expectation. 

The three main investment priorities as of now are Reels, ads and the metaverse, said Zuckerberg, all of which need to be monetized effectively:

We're managing headwinds from the shift to short-form video. In the near-term, this is a drag on revenue because Reels monetization is less than Feed or Stories, but I expect that will improve over time. We've seen this type of media format transition multiple times before. Back in 2012 when we transitioned from desktop feed to mobile feed, we saw mobile feed growing massively, but not monetizing well yet. We leaned into it, went through some tough quarters, and then it became the foundation of our business today.

Similarly, in 2018, when people started using Stories more instead of Feed, but Stories didn't monetize as well as Feed yet, we still doubled down on Stories, had another tough period, but came out stronger than ever. So we've run this play before and we're running it again now. We're focused on growing Reels as a major part of the Discovery Engine vision, and we expect that this expansion in engagement to shift from a short-term headwind to a tailwind at some point.

Reeling 

Chief Operating Officer Sheryl Sandberg noted that half of the time spent by users on Facebook now relates to video. This, she argued, is a great opportunity as “we get better at monetizing short-form video over time. That means improving the Reels ad format, something which she said is underway:

A great example is the US restaurant chain Wendy’s. They used a range of video formats across Feed, Stories, Reels and in-stream to promote their March Madness campaign, driving consumers to the first virtual Wendy’s restaurant in Horizon Worlds. We also worked with them to promote the campaign in Horizon Worlds itself, with a virtual welcome screen directing people to what they called 'The Wendyverse'. The campaign was a big success, reaching 52 million people, and improving Wendy’s brand and message awareness across a number of metrics.

But it will be a multi-year journey for Reels, she added:

We have great consumer engagement on Reels. We have fast growth. And we have a playbook for taking that kind of consumer engagement and rolling out ads into the experience…While this still monetizes at a lower rate versus feed and Stories, advertisers who are using it are seeing really promising results.

I’ll share an example. Prose is a direct-to-consumer hair care brand, and they A/B tested adding a Reels ad placement to their usual campaign, they saw a 23% lower cost per purchase, a 52% higher unique audience reach and 3x higher video completion. So what that says is that this format works not just for this advertiser, but we’re hearing this from many across the board and we think we can help a lot of advertisers adopt this in the coming years.

And despite the slow down in investment elsewhere, nothing is going to distract Zuckerberg from the metaverse, it seems:

While we're focusing on the biggest opportunities and challenges of today, I think it's important to build the foundation for the next era of social technology as well. The centerpiece of our strategy is the social platform that we're starting to build with Horizon. It's still early but as we build out the experience, the next focus will be on growing the community. We plan to launch a web version of Horizon later this year that will make it easy for people to step into metaverse experiences from a lot more platforms, even without needing a headset.

My take

Wall Street liked what it heard.

The other thing that stood out on the post-results analyst call? No-one asked Zuckerberg about Musk and his Twitter ambitions or the likely impact on the market. Not one. I'm trying to decide whose ego is most likely to be dented by that - Musk for not being front of mind or Zuck for not getting asked his opinion? 

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