Meta Platforms (META 0.21%) is a stock that’s picking up steam again. Fresh off a strong earnings report that beat expectations, the company is back in the good graces of investors, at least for the time being. After the latest round of layoffs and cost-cutting, has the company become a better investment, and is the stock heading for even greater gains?
Meta is growing again
Meta Platforms has been struggling in recent quarters to generate any growth whatsoever. A softening economy has resulted in weak demand for ads, which has made it difficult for Meta and other social media companies to keep their top lines from falling. But when Meta reported its latest earnings numbers on April 26, the business delivered a surprise: Sales of $28.6 billion for the first three months of the year were up 3% from the prior-year period and came in better than analyst expectations.
In addition to revenue growth, the tech company also reported increases in active users, with Facebook’s daily active users totaling more than 2 billion and rising by 4% year over year. Its “family daily active people” metric, which includes all of its social media platforms (e.g., Instagram and WhatsApp), averaged just over 3 billion and was an increase of 5% from the same period last year.
It was encouraging growth for the business, but it has me wondering how much of it was due to factors outside of Meta’s control. For example, Elon Musk’s policy changes and drastic layoffs at Twitter have led to many big advertisers, including Coca-Cola and Wells Fargo, pulling ad money out of the platform. And many countries and U.S. states have also been banning TikTok due to concerns about the Chinese government accessing user data through that platform.
TikTok and Twitter have been two of Meta’s biggest rivals in recent years, and if many advertisers are not using those platforms anymore and are going elsewhere (such as Facebook and Instagram), that could help explain why Meta may have had a better performance this past quarter. That’s why it may also be a bit early to declare this a turnaround quarter for Meta Platforms and its business.
Meta is still spending billions on the metaverse
Meta’s improving growth rate is a positive, but it’s arguably all for naught if the company is spending more money on the metaverse. In Q1, the company’s net income declined by 24% to $5.7 billion. A big part of the worsening bottom line was due to massive restructuring charges. In March, the company announced it would be laying off 10,000 employees, on top of layoffs it already announced in the previous year. Meta’s restructuring charges totaled $1.1 billion last quarter.
The more concerning issue, however, is that Meta’s Reality Labs business, which includes spending on the metaverse, incurred an operating loss of just under $4 billion for the past quarter. That’s deeper than the near-$3 billion loss it incurred a year ago. The company also said in its earnings release that, “we continue to expect Reality Labs operating losses to increase year-over-year in 2023.”
Is Meta Platforms stock a buy?
Meta Platforms did have a slightly improved quarter given its positive growth rate, but investors shouldn’t read too much into that just yet. The economy is still heading for a recession and the social media company may have simply benefited from advertisers looking for alternatives to TikTok and Twitter. In the big picture, the company’s bottom line may continue to come under pressure with more metaverse-related spending still coming.
Meta has a solid business with Facebook, Instagram, WhatsApp, and Messenger, but it needs to ditch the metaverse to become a much better buy. While the stock is rallying as a result of earnings, investors may want to wait at least another quarter or two to see if Meta can build on this growth rate and to see how much deeper its losses from the metaverse might be.
Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
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