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Meta earnings had ‘a lot to like,’ analyst says

Citi Senior Analyst Ronald Josey joins Yahoo Finance Live to discuss Meta earnings and investments, ad-spend, cost-cutting meausres, investing in the metaverse, and the outlook for Meta.

Video transcript


- Meta in focus this morning as shares jumping following a strong earnings report. CEO Mark Zuckerberg on the call says the company is aiming to be more efficient in 2023. Take a listen.

MARK ZUCKERBERG: 2022 is a challenging year, but I think we ended it having made good progress on our main priorities and setting ourselves up to deliver better results this year as long as we keep pushing on efficiency.

- Well, joining us now to break it all down is Ronald Josey, Citi senior analyst of the internet sector. Good to see you, Ron. So now, this is interesting. Usually-- ever since Meta changed its name, it has not been smooth sailing at all.

But investors really honing in on this forward guidance, what they saw with engagement, and really hear about this more disciplined use of their finances. What did you like the most in this report?

RONALD JOSEY: Michelle, there is a lot to like. But to be clear, it's still relatively early days as we try to get back to a post-IDFA world, so to speak. But frankly, we went into this print looking for insights around maybe improved savings or efficiencies on OpEx and CapEx. We got that.

We went into the print looking for greater overall engagement. And we heard that basically users on WhatsApp, Instagram, and Facebook are at all-time highs, which we think is because of Reels and just greater overall discovery of content across the service. And we went in hoping to get some insights that, OK, we're now more than lapping Apple's IDFA changes. So all of these investments that Meta has done over the past year plus, what's the progress here?

And what we found was that conversion rates for advertisers grew 20% in the quarter. And so, when we think about conversion rates going up, pricing is actually lower for a variety of reasons. That speaks to high return on ad spend. And so we think, coming out of this quarter, that you have definitely some light at the end of the tunnel in terms of perhaps the top line can improve as a year goes on, engagement continues to be strong, and you have a more efficient overall business.

So there's a lot to like here. But to be clear, it's still early days, and there's a lot of macro uncertainty that's out there still. But certainly more positive.

I mean, we certainly see that when you look at some of these analysts upgrades that we saw to Meta and increases to price targets here, when you're looking at Piper Sandler, they're rating they're going up to $250 for their price target. We did see that overweight rating for Piper Sandler and JP Morgan, some of the higher price targets. JP Morgan, who also named Meta-- predicting them to be the internet company of 2023. But is all of this enough to make us forget the Metaverse itself, and the investments that Facebook is making in this, and where they still plan to go?

RONALD JOSEY: Yeah, well, I mean, I think one of the key and clear takeaways from the call yesterday was that Metaverse investments will absolutely continue. And that's something that is going to be a part of the business because that's more of a five, 10-plus-year lookout in terms of the opportunity on the Metaverse and VR, et cetera. But the core business is doing better.

And so we walked away from this just feeling as if the stock to own-- it's certainly one of our top picks, our top advertising pick, for sure. And they're operating better, and we're seeing that top line do better, as well. And our price target is actually higher than the one on the screen. And so we're pretty excited about what Meta can do.

We're not forgetting about the investments in the Metaverse and Reality Labs. We just think the majority investments are going towards the core family of apps, their social networking sites that they're running. And that should continue because that's where we're seeing the greater returns.

- And certainly upbeat as well on their total operating expenses, as well. Some cutting there. But which parts of the business, then, do you expect them to start cutting back on? Where will we see those trimming come from?

RONALD JOSEY: Well, we saw a lot of it already, right? I mean, so we saw the massive reduction in force that they announced in November. And we saw, as a result, this is now the second time they've lowered their operating expense and CapEx guidance since 3Q earnings. The investments that we're going to see sort of pull off-- look, I mean, it might be we're not going to see pedal to metal on the Metaverse as much, right? But we are going to see, in my view, continued investments on engagement, continued investments on greater signal, and on higher sort of focus on return on ad spend around the advertising side.

So we're hearing a lot around newer ad products with Advantage+, with sponsored Reels, with click to message, shop ads, et cetera. I think you're going to still see a lot of innovation here. And you can do a lot of innovation with $90-plus billion in OpEx and call it 30-some-odd-- 33 billion, 31 billion in CapEx. So we're still going to see investments, just maybe not as much on maybe the fringe ideas of what they were investing in before.

- And obviously, Meta not immune to a lot of these job cuts. We're probably going to see more based on what Mark Zuckerberg was saying. He's saying they're working on flattening the organization structure, removing some layers of middle management so they can make decisions faster, be more nimble. How deep do you think the cuts are going to have to get to really get them to where they want to be?

RONALD JOSEY: Well, I would tell you, Michelle, the one-- the key thing coming out of this quarter isn't necessarily that, oh, my gosh, advertising is back, because there's still a lot of room to go in terms of getting to just traditional growth rates of double digits, right? But we did come out of this quarter just feeling a lot better around the cost side.

And so when we look at-- from our perspective, we can hang our hat now on perhaps our earnings per share of over $10 for this year over $12 plus for next year. And as long as we have that baseline, I think anything additional to that is basically-- will help the overall business do better. So whether there's more cuts or not, I'm sure there are some more trims as the year goes on, as the macro uncertainty unfolds. And we heard all the macro issues yesterday with rate hikes, et cetera.

So I think there's still potential for cuts. However, frankly, we came out of this quarter feeling as if they've made a good amount already. I think the market and the stock can support a higher multiple over the next year or so. And if there's more cuts to go, I think they can actually do that without impacting that top line growth that we're looking for.

- Investors certainly seem to think so. This will be an interesting one to follow, see how this plays out, if they can meet all those cuts that they're trying to make, get to that year of efficiency. Ronald Josey, Citi senior analyst. Thank you for joining me.