Meta Is Getting Leaner
Contributor since 2012 / 4177 Followers
Summary:
- CEO Zuckerberg revealed in a recent podcast that changes made by Elon Musk at Twitter have made it easier for other companies like Meta to get leaner.
- Meta will remain leaner by not hiring so many people as quickly.
- AI is being used to boost engagement and monetization.
Kira-Yan
Introduction
My thesis is that Meta (NASDAQ:META) will be a more efficient company moving forward now that they’re getting leaner.
Things have gotten better for Meta since the time of my February article. It covered the way Meta planned on getting more efficient but now we’ve seen management following through with their plans and CEO Mark Zuckerberg has clarified his thought process.
Getting Leaner
It was evident Meta needed to get leaner when Executive VR Consultant John Carmack from Oculus wrote a memo about his resignation. Stating Quest 2 “could have happened a bit faster” sounds like a euphemism for saying there were too many people holding things up. This part of the memo from Engadget speaks for itself:
“We have a ridiculous amount of people and resources, but we constantly self-sabotage and squander effort,” he wrote. “There is no way to sugar coat this; I think our organization is operating at half the effectiveness that would make me happy.”
Meta CEO Zuckerberg spoke about getting leaner with Lex Fridman in a June 9th podcast. Noting that Twitter owner Elon Musk led a push early on to make Twitter leaner, CEO Zuckerberg said this caused everyone in the industry to ask questions about their companies. CEO Zuckerberg communicated that he thinks Twitter owner Musk generally made good changes in terms of making Twitter more technical and decreasing the distance between engineers and the rest of the company. Others in the industry may have been shy about making these changes in the past but it is now easier given what we’ve seen from Twitter owner Musk. CEO Zuckerberg believes the way organizations are being reshaped can be good for the industry as these companies become more productive over time.
Speaking about Meta specifically in the podcast, CEO Zuckerberg said he wanted to become a stronger technology company with a focus on building higher quality products at a faster rate; he decided they need to get a lot leaner. Wanting to empower engineers, he sought to make sure they aren’t just leaf nodes of the organization with too many layers of management covering the people actually doing the work. Changes have since been made so that the folks running Meta don’t have as much latency on information from the engineers.
Later in the podcast, CEO Zuckerberg said Meta will remain leaner by not hiring so many people as quickly. This will enable them to move to a structure where there is a higher percentage of engineers than in the past. One sorting function they’ll use for hiring is the internship system; anyone can put together a nice resume but fitting in and doing the right work in the right manner is more difficult.
Valuation
Apple’s ATT challenges reduced Meta’s valuation but adjustments are being made. Meta COO Javier Olivan and CFO Susan Li spoke with Morgan Stanley’s (MS) Brian Nowak at a March 2023 MS tech conference. COO Olivan said there are two things needed to overcome ATT challenges. The first is to make the ads more relevant such that they perform better. The second is to bring conversions on site. AI helps automate campaigns and increase the relevancy of ads:
It allows you things like Advantage+ shopping plus to test 150 different combinations of targeting, ranking, creative. And the system optimizes it for you so you just don’t have to be manually tweaking the campaign all the time.
Later during the MS tech conference, it was revealed how AI helps with measurement. These advances increase Meta’s potential for additional ad revenue which boosts valuation (emphasis added):
Similarly with measurement, measurement is critical for advertisers. They make decisions based on what the campaigns are doing. So more powerful machine learning and AI is allowing us to increase the attribution window for campaigns from 7 days to 28 days and also give some cuts like on gender, age that were not possible before and are now, thanks to the improvement on the algorithms.
One revenue stream that has been helpful despite ATT challenges is the click-to-messaging ad channel which has more than a $10 billion run rate per statements from the MS tech conference. Additionally, COO Olivan reminded us that Meta announced after 3Q22 that click-to-messaging was growing 80% year-over-year. Also, he gave a click-to-message anecdote from General Motors (GM) in Brazil (emphasis added):
And there, it’s not really just limited to people talking to small and medium businesses to the baker in the corner. It’s large enterprises like General Motors in Brazil. They run a campaign and over 60% of their cars that are sold were started in WhatsApp conversations. They sold over 5,000 cars that started in WhatsApp conversations. So that’s one thing I would encourage everyone to do is just really intuitively understand what is happening because it really is transformative.
CEO Zuckerberg explained in the 1Q23 call how Meta is using AI to boost engagement and monetization which ultimately lift valuation (emphasis added):
Along with surfacing content from friends and family, now more than 20% of content in your Facebook and Instagram feeds are recommended by AI from people, groups, or accounts that you don’t follow. Across all of Instagram, that’s about 40% of the content that you see. Since we launched Reels, AI recommendations have driven a more than 24% increase in time spent on Instagram. Our AI work is also improving monetization. Reels monetization efficiency is up over 30% on Instagram and over 40% on Facebook quarter-over-quarter. Daily revenue from Advantage+ Shopping Campaigns is up 7x in the last six months.
Later in the 1Q23 call, CEO Zuckerberg went on to say paid messaging on WhatsApp has grown 40% quarter-over-quarter. CFO Susan Li explained in the 1Q23 follow up call that click-to-messaging revenue is not cannibalizing other revenue streams:
Advertiser adoption continues to broaden, and we estimate that over half of click-to-message advertisers are exclusively using click-to-messaging ads on our platform, which means they’re really driving incremental demand, which is so important for us.
CEO Mark Zuckerberg opened the 4Q22 call by saying the theme for 2023 is the Year of Efficiency and the 1Q23 numbers show he was serious. The 1Q23 earnings release shows that earnings per share went from $2.72 in 1Q22 down to $2.20 in 1Q23 but it notes that 1Q23 would have been $0.44 higher at $2.64 without restructuring charges. The operating margin would have been 29% without restructuring charges which is fairly close to the 1Q22 margin of 31%.
A June NY Times article talks about Apple’s metaverse investments and their $3,500 hardware. I believe Apple’s efforts in this space shows there is a reason to get excited about it. Meta’s valuation has taken a hit as they have made heavy investments in this area but their $500 hardware coming out in the fall might turn the tide. CEO Zuckerberg explains in the NY Times article why Meta’s more social approach should be better than Apple’s approach in some respects:
Their announcement really shows how our vision and values are different and what’s at stake in shaping this platform,” Mr. Zuckerberg said. “Our vision of the metaverse and presence is fundamentally social and about people interacting and feeling closer in new amazing ways. By contrast, every demo Apple showed was someone sitting on a couch by themselves.
2Q23 revenue is expected to be $29.5 to 32 billion which is up from the $29.1 billion we saw in 2Q21 and the $28.8 billion we saw in 2Q22. Seeing as management plans to continue compounding earnings as I said in my February article, I expect Meta to pass the 2021 operating income level of $46.8 billion in the near future. I’m more optimistic about valuation than I was in February due to the fact that management continues to execute. If we use a multiple of 15 to 20x 2021 operating income then the valuation range is $700 billion to $935 billion
The 1Q21 10-Q shows 2,835,464,834 shares outstanding (2,396,047,121 + 439,417,713). In just two years, this has gone down almost 10% to 2,562,732,034 shares outstanding (2,212,153,203 A + 350,578,831 B) per the 1Q23 10-Q. Multiplying by the June 13th share price of $271.32 gives us a market cap of $695 billion. The market cap is lower than my valuation range and I think the stock is a buy for long-term investors.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of META, AAPL, AMZN, GOOG, GOOGL, VOO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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