Meta Stock Soars after Q2 Earnings Beat as Markets Cheer ‘Year of Efficiency’

Meta Platforms (NYSE: META) stock is trading sharply higher in US price action today after it reported better-than-expected earnings for the second quarter and provided an upbeat outlook. Wall Street analysts also turned even more bullish on the stock as markets cheer the company’s “year of efficiency.”

Meta reported revenues of $32 billion in the quarter which was 11% higher than the corresponding quarter last year and ahead of the $31.12 billion that analysts expected. Notably, this is the first time since 2021 when Meta reported a double-digit rise in revenues. Its revenues fell YoY in the final three quarters of 2022 before rising in single digits in the first quarter of 2023.

The company’s Q3 guidance was also ahead of estimates and implies a YoY growth of 15% at the low end.

Meta stock rises after better-than-expected Q2 earnings

Meta reported an EPS of $2.98 which was ahead of the $2.91 that analysts were expecting and 21% higher than the corresponding quarter last year. Its CEO Mark Zuckerberg previously said that 2023 is the “year of efficiency” for the company and it has embarked on an aggressive cost-cut plan, and among others, it has slashed its workforce by a quarter – which is the highest among FAANG peers.

The company reported daily active users (DAUs) of 2.06 billion in the quarter which was ahead of the 2.04 billion that analysts expected. Its average revenue per user (ARPU) came in at $10.63 which was higher than the $10.22 that analysts expected.

In his prepared remarks, Zuckerberg said, “We had a good quarter. We continue to see strong engagement across our apps and we have the most exciting roadmap I’ve seen in a while with Llama 2, Threads, Reels, new AI products in the pipeline, and the launch of Quest 3 this fall.”

Zuckerberg is bullish on Threads

During the earnings call, Zuckerberg sounded quite bullish on Threads which is the Twitter-like app that it launched earlier this week. Zuckerberg said, “we have a lot of work to do to really make Threads reach its full potential. That’s not a foregone conclusion yet, even though I think we’re off to a great start. And I’m optimistic that, over time, this could be a fifth great app in the Family of Apps.”

He said that after the strong start to Threads, Meta is now focusing on retention and improving the basics of the app. Subsequently, the company would focus on increasing the community which would be followed by monetization.

Reels monetization has increased

During the earnings call, Meta said that Reels which it launched to take on TikTok is now running at an annual run rate of $10 billion as compared to only $3 billion in the last fall. Zuckerberg also touted the AI pivot and said, “Beyond Reels, AI is driving results across our monetization tools through our automated ads products, which we call Meta Advantage. Almost all our advertisers are using at least one of our AI-driven products.”

Meta also lowered its capex guidance for 2023 from $30 billion to $27 billion. It said, “The reduced forecast is due to both cost savings, particularly on non-AI servers, as well as shifts in capital expenditures into 2024 from delays in projects and equipment deliveries rather than a reduction in overall investment plans.”

Reality Labs posted a $3.7 billion loss

Meta Platforms’ Reality Labs which is building the metaverse posted a loss of $3.7 billion on revenues of a mere $276 million. The business lost $13.7 billion in 2023 and Zuckerberg has defended the investments saying they are crucial for the company’s success in the long term.

The company expects Reality Labs losses to “increase meaningfully year-over-year due to our ongoing product development efforts in augmented reality/virtual reality and investments to further scale our ecosystem.”

Wall Street gets even more bullish on Meta stock

Wall Street analysts had started to get bullish on Meta stock amid the aggressive cost cuts. After the company’s Q2 earnings release, Wall Street got even more bullish on the Mark Zuckerberg-led company.

Morgan Stanley analyst Brian Novak raised his target price from $350 to $375 and said, “META’s AI investments continue to drive higher engagement, advertiser return, platform monetization and EPS. And the product pipeline is flush with a September AI event catalyst.”

He added, “the current combination of rising platform-wide time spent and rising monetization of the new engagement (in particular on Reels) reminds us of the period when META was first growing/monetizing core Facebook, then Instagram…and then Stories. Engagement grows, monetization follows.”

Goldman Sachs raised its target price on Meta

Goldman Sachs also raised its target price on Meta from $300 to $384 and said, “While there were some mixed narratives (both qualitative and quantitative) around opex/capex in 2023/2024, our view is that management’s ‘year of efficiency’ theme continues to drive a sustained mentality shift inside the company – while long-term investments behind key objectives remain a focus area (in terms of infrastructure & talent), we expect management to continue to balance driving growth and increased returns.”

Wells Fargo admitted that it was wrong about Meta and upgraded the stock from equal weight to overweight while raising the target price from $313 to $389.

JPMorgan maintained its overweight rating on Meta while raising the target price to $425 – which is among the highest on Wall Street.

In its note, JPMorgan analyst Doug Anmuth said, “Meta’s considerable AI investments over the past couple years are paying off as AI-generated content drives incremental engagement (7% higher on FB) and AI powers Advantage.”

Meta stock has outperformed in 2023

After a terrible 2022, Meta stock has rebounded in 2023 and is the second-best S&P 500 stock. However, it still remains below its 2021 highs. In the FAANG pack, only Apple has surpassed its previous highs and all the other four constituents remain below their previous highs.

That said, with the massive rally today, Meta has further increased its YTD returns and strengthened its lead over FAANg peers.