It’s a very weird feeling to witness Meta’s share price leap by 22% post a stellar quarter—and an astounding 440% since November 2022. Almost uneasy. And it’s hard to explain, because in this case, the rise in share price is grounded in solid business performance
The chatter of skepticism that once filled my feed has quieted; no more echoes of doubt about owning Meta stock, no lingering shadows of the negative narratives that once swirled around its decline in share price.
In my investing course, Meta became a recurrent theme, one I’ve discussed in every live cohort and covered extensively in Steady Compounding Insider Stocks through eight comprehensive updates, as we navigated the company’s tumultuous phase marked by a narrative of negativity.
Largest Market Cap Movements
Today marks a historic moment for Meta, boasting the largest single-day market cap gain ever recorded.
Taking a trip down memory lane
This contrasts sharply with the record market cap drop it faced just two years ago. My report “Meta Is Down 23% Post-Market, What Happened?” emphasized to Insider Stocks members that the market’s reaction failed to see the bigger picture.
In spite of beating revenue estimates, the company failed to meet profitability expectations. It was punished by the market, but there was more going on beneath the surface.
In my report published on 4 February 2022, I highlighted the temporary nature of Meta’s operating margin squeeze due to sporadic legal costs and moderate rises in R&D and marketing spend—factors not warranting panic:
“The operating margins compression was largely a result of a temporary increase in general & administrative expenses (primarily legal related expenses which tends to be lumpy) and to a lesser extent a mild increase in R&D and marketing expenses , which is not cause for concern.”
Meta was also boldly prioritizing its future by embracing Reels, despite its initial cannibalization of existing platforms. This strategic foresight deserved applause, not condemnation. Here’s an excerpt from that same 2022 report:
“Reels have gained traction on Instagram and to a lesser extent on Facebook. Reels is monetizing at a lower rate than Feed and it is cannibalizing the users’ time spent (and therefore revenue) on Feed, just like their introduction of Stories when Snap first came out. As CEO, Mark has led the company through various transitions, and Meta is working to build up Reels’ flywheel by making it as easy as possible for creators to share and monetize content. There will be some pressure on impression growth near-term, but it is important to focus on the growth of Reels.”
Fast forward to today, Reels thrives across Meta’s platforms, boasting a daily share rate of over 3.5 billion. Its influence on Meta’s revenue is now unequivocal, with video watch times surging by 25% year-over-year in Q4.
The iOS changes by Apple posed industry-wide challenges, but Meta’s vast data reservoirs and considerable resources positioned it to navigate these changes better than most, as I’ve noted:
“In addition, we will need to watch how Meta adapts to the changes in iOS. Granted, they should be least affected of all the social media companies, but that does not make it okay. It will be necessary to monitor how Meta provides targeted ads with minimal data and bridge the data lag so that marketers can get immediate feedback on their campaigns.”
Meta’s Financial Milestones in Q4 2023
The company’s financials for the fourth quarter of 2023 are nothing short of impressive, with significant gains across the board from revenue to free cash flow.
– Revenue climbed to US$40.1 billion, a 25% increase year-over-year.
– Operating profits soared to US$16.4 billion, up by a staggering 156% year-over-year.
– Operating margins nearly doubled from 20% to 41% year-over-year.
– Free cash flow surged to US$11.7 billion, marking a 115% increase year-over-year.
– FCF margins expanded significantly from 16.7% to 29% year-over-year.
Business Performance in Q4 2023
A closer look at Meta’s business segments reveals the sustained profitability of the Family of Apps and the aggressive investments in Reality Labs.
– The Family of Apps remains the revenue powerhouse at US$39 billion, accounting for 97.3% of total revenue, with a robust operating margin of 53.8%.
– Reality Labs trails with US$1 billion in revenue, reflecting 2.7% of the total and an operating loss margin of -460%. We anticipate these losses will deepen as Meta doubles down on augmented and virtual reality.
User engagement is robust, with daily active users reaching 3.2 billion and monthly active users nearing 4 billion—up 8% and 6% year-over-year, respectively.
Ad impressions have surged by 21% year-over-year, signaling increased user engagement, while the average ad price rose by 2% year-over-year, reflecting heightened demand and the platform’s growing advertising clout.
The e-commerce and gaming sectors, particularly from Chinese advertisers seeking growth beyond their challenging domestic market, have fueled a significant portion of this ad revenue growth.
Share Repurchases and Dividend Announcement
The company is continuing to repurchase shares aggressively, repurchasing US$6.3 billion in the most recent quarter, bringing the total amount of shares repurchased for the year to US$20 billion. Meta still has US$81 billion available for share repurchases. Over the past few years, management has often been criticized for purchasing back shares at an “overvalued” range because the share price kept falling, but that doesn’t seem to be the case now. Another reminder to disregard short-term market chatter.
Perhaps the most surprising is Meta becoming one of the first tech companies of its generation to become an adult, and declared its first quarterly dividend of $0.50 a share, with plans to keep paying quarterly dividends in the future.
The Growth Story Continues
Despite paying a dividend, the company’s growth story isn’t over yet. With its year of efficiency completed, Meta plans to accelerate its growth trajectory by investing in its recommendation AI. Due to their growth efforts, we can probably expect profitability to be temporarily suppressed in the near term.
Reminding You of the Risks
When the share price goes up, people forget about the risks, and I’m here to pour some cold water in case your animal spirits take over. There are antitrust regulations to worry about, the company is susceptible to economic slowdowns (companies spend less on ads when demand is low), and competitors are clawing at its moat to bring it down.
Leadership Through Turbulence
Mark Zuckerberg has shown time and time again that he can lead the company through difficult moments, from the transition from desktop to mobile, from feed to stories, to Reels, Cambridge Analytica, Tik Tok, Apple iOS changes and more. Best of all, he is still just 39 years old and still seems excited about the company’s progress.
If you found this write-up helpful, I encourage you to share it with others interested in Meta’s journey by forwarding this post.
Speak soon,
Thomas
P.S. For more research like this, check out Steady Compounding Insider Stocks, where I uncover Steady Compounders that can grow our wealth for decades. The next report will cover Tesla’s latest earnings, and whether this is an opportunity or a time to sell. You can check out Steady Compounding Insider Stocks here: https://steadycompounding.com/membership/