Meta beats earnings expectations with the help of ad revenue growth

The social media company, Meta Platforms Inc. (META), beat earnings estimates for the second quarter of 2023, thanks in part to its strong advertising revenue growth, which was aided by AI-driven products.1

Meta Platforms Inc. reported its second quarter 2023 results on pages 1-3. The shares surged as much as 7% in after-hours trading and are up 8.75% pre-market on Thursday.

  • Meta Platforms’ shares jumped roughly 8.75% pre-market after the company reported its best quarterly revenue growth in close to two years on July 26.26.
  • AI-driven content aided in fueling overall revenue gains of 11% for the quarter, with ad revenue growth reaching 12%.
  • The company’s metaverse unit, Reality Labs, posted operating losses of $3.8 billion; Meta says it expects to widen those losses going forward.

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A.I. enables revenue to grow at the fastest pace in almost two years

Meta’s second-quarter revenue increased 11% over the same period last year, reaching almost $32 billion. This growth was primarily driven by a 12% jump in advertising revenue, making it the fastest clip of growth since the end of 2021. Ad spending has recently experienced a slowdown, and targeted ads on Apple Inc. (AAPL) products have faced challenges due to an operating system privacy change. However, there is now a turnaround in progress.

Meta’s advertising revenues have picked up pace.

Meta’s advertising revenues account for 98% of total revenue, totaling in USD billions.

AI-generated content drove a 7% increase in time spent on apps, particularly short-format video ‘Reels,’ and improved engagement and monetization across the spectrum of applications.

Our automated ads products, which we call Meta Advantage, are driving results across our monetization tools with the help of AI. CEO Mark Zuckerberg stated on the earnings calls Wednesday that almost all of our advertisers are utilising at least one of our AI-driven products.2

Rival social media platform Twitter faces one of the biggest hurdles in monetization, as it appointed a new CEO earlier this year to address this specific problem. Zuckerberg stated that Meta will focus on monetizing Threads application after it achieves scale, as engagement dropped off after initial hype.

Jobs Cuts Not Enough To Rein In Expenses

Meta has implemented a headcount reduction plan that has resulted in about 21,000 fewer employees. This has led to a decrease of approximately 10% in internal forecasts for full-year capital expenditures for 2023 in the ‘Year of Efficiency.’

However, legal accruals drove a 39% increase in general and administrative expenses for the quarter, partially offset by these cost-cutting measures. The company raised its guidance for expense estimates for the year to $86-$91 billion, with only $4 billion coming from severance, facilities consolidation, and other personnel costs.2

Still, Meta is likely to experience growing costs going forward as it heavily invests in its metaverse-focused segment, Reality Labs. Reality Labs reported operating losses of $3.8 billion for the quarter and expects these losses to increase in the future.

Key Metric: Monthly Active Users

Facebook’s monthly active users increased by 3% to 3.03 billion for the second quarter. Meta’s advertising business relies on MAUs to continue growing, as they are the company’s primary source of revenue.1

Since the start of the year, Meta shares have increased by 148%, surpassing the Nasdaq’s 41% gain over the same period.

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