Yahoo Finance Meta’s Improved Ad Sales Buy Time for Zuckerberg’s Metaverse
(Bloomberg) -- Meta Platforms Inc. said that a recovery in advertising will drive revenue growth at the fastest rate since 2021, helping Chief Executive Officer Mark Zuckerberg rekindle investor support for his longer-term ambitions.
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Meta’s revenue could grow as much as 20% in the current quarter, the company said Wednesday. That’s a pace the social media giant hasn’t seen since before the sluggish post-pandemic economy and a privacy rule change from Apple Inc. led to the worst rout in Meta’s digital ad sales in history. Revenue declined for the first time ever last year, prompting investors to lose patience in Zuckerberg’s spending outside of the core business.
After cutting thousands of employees and improving efficiency of the advertising business through artificial intelligence, Zuckerberg is now on stronger footing with his shareholders. Even news that expenses will continue to climb over the next two years didn’t dampen the shares, which rose more than 7% in after-market trading following the earnings report.
“We think return on investment is becoming more clear,” said Dan Salmon, an analyst with New Street Research LLC, who recently upgraded the stock to “buy.”
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Meta’s advertising acceleration and leaner business may provide the air cover Zuckerberg needs so he can continue spending on artificial intelligence and his far-off vision for the metaverse, a virtual-reality world the CEO expects everyone to embrace one day. On a call after the report Wednesday, executives promised to remain careful about spending and priorities.
“We expect to bring the discipline and habits that we built during this year of efficiency with us as we plan for the future,” Chief Financial Officer Susan Li said. “At the same time, we remain focused on investing in the significant opportunities ahead. This is particularly true in the areas we see the most significant opportunity, which include AI and the metaverse.”
Meta reported revenue of $32 billion for the second quarter, beating analyst estimates of $31.1 billion. Zuckerberg and Li made sure to associate their plans to increase spending with improvements in the core business.
“We see a host of opportunities Meta can capitalize on to monetize AI,” said Angelo Zino, an analyst at CFRA. That includes improving recommendations and ranking, and using generative AI to create new products.
That includes AI chatbots, “agents” and “coaches” that Zuckerberg teased on the call. AI “is going to both complement and touch and transform every single thing that we’re doing. And I’m really excited for it,” he said.
Meta’s recovery in advertising revenue is thanks to an investment in Reels, the short-form videos on Instagram and Facebook that were made to copy rival TikTok’s format. Reels have been played more than 200 billion times on Instagram and Facebook, becoming more popular due to improvements in targeting each person’s feed with videos that will fit their interests, Meta said.
Meta’s commitment to showing users more Reels – and advertisements among the video clips – has also curbed profitability because those ads don’t make money for the tech giant as quickly as other content types. Still, revenue from Reels is growing, reaching an annual sales rate of $10 billion, Zuckerberg said, up from $3 billion in the third quarter of 2022.
That momentum is allowing Zuckerberg to keep losing money on the metaverse — a sticking point with investors last year. In Wednesday’s report, Meta said Reality Labs, the division that makes metaverse tech, posted an operating loss of $3.7 billion.
“I can’t guarantee you that I’m going to be right about this bet,” Zuckerberg said, but “I think we are going to be happy that we did this.”
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