Doubling Down on Meta (NASDAQ: META)

Problems on Twitter and TikTok may favor META

TikTok has been a formidable competitor to Meta Platforms, Inc. (NASDAQ: META) and now leads the chart for time spent on the platform by US adults. According to eMarketer, TikTok and YouTube lead the way with about 45 minutes each for average daily time spent per user, compared to Facebook and Instagram at a combined 60 minutes. Not surprisingly, TikTok has achieved 45 minutes/day in the US (up from zero) over the past four years, but now the company has been under a regulatory cloud in the US and could face strong headwinds in the short term in the US.

TikTok is in talks with CFIUS, an interagency body that conducts national security reviews of foreign companies’ deals, to assess whether it can operate in the US as a separate entity after divesting Chinese parent company ByteDance. The company came under regulatory scrutiny following several published reports claiming that user data is unsecured on the platform since it is stored outside of China.

The public comments from the Federal Communications Commissioners and, more recently, from the head of the FBI certainly reflect the challenging environment TikTok faces in its US operations. While it is too early to conclude that a US ban on TikTok is imminent, I think the risk of being portrayed as a national security threat could limit any gains in ad spend from big brands, which could benefit other social media platforms as META.

Similarly, Twitter, Inc. (TWTR) is struggling with ad spending from leading brands. According to a report by Media Matters for America, Twitter has lost about half of its top 100 brand advertisers since Elon Musk took over the company. In addition, Twitter is now struggling with an image problem with its new CEO’s political stances, which is causing concern among leading advertisers.

Several marketing groups, such as IPG Mediabrands and Omnicom Media Group, have advised brands to refrain from advertising on Twitter because it fails to provide an environment that is “brand safe.” Some notable brands that have stopped advertising on Twitter include General Motors, Coca-Cola, Heineken, Mars, Nestle and Ford.

Leading brand advertisers moving away from Twitter to other social media platforms, including Meta, Google and Snap, will help their market share amid rapid change and growing uncertainty on Twitter, along with layoffs.

Snell continues to be a growth catalyst

The low monetization of growing user engagement around Meta’s TikTok clone, Reels, helped erode Meta’s advertising pricing power. However, Meta continued to provide supportive commentary around Reels, which is a crucial part of the bull case over the next few years.

The company has begun selling ads that match the new short video format, and this approach is paying off. Last quarter, the annual revenue run for Instagram Reels ads passed $1 billion, and further scaling of the new ads across both Instagram and Facebook has increased the combined run rate across those apps to $3 billion. However, this still corresponds to only 2.5% of advertising sales. Improving earnings around Reels is a high priority. Meta nevertheless expects the shift from its more lucrative ad formats to new short video ads to be negative for possibly another 18 months.

Reels are currently incremental to total engagement time, and management highlighted that there are 140 billion+ reel plays on Facebook and Instagram daily, a 50% increase compared to two quarters ago. More importantly, Reels is not only additive to the total time spent, but also takes part from TikTok. This weakens one of the more structural bear arguments around TikTok siphoning engagement share from platforms like Facebook/Instagram.

Surprisingly, Reels outperforms TikTok for median reach, and some brands have reported higher engagement and views on Instagram. Strong Reels engagement indicates that the health of the ecosystem is improving, which should bode well for future revenue growth, especially as the macro environment becomes more favorable.

Earn money on messages and WhatsApp

Meta highlighted the continued success of messaging monetization through its click-to-message and paid messaging products to allow businesses to easily establish a direct relationship with customers. The company noted that its click-to-message ad product now generates ~$9 billion in annual run rate, representing ~7-9% of Meta’s total revenue in 2022.

Not only can push ads potentially play a bigger role within Meta’s wider advertising ecosystem, but more importantly, they can bring more commercial activity directly into the properties, capture user intent and thus help reduce signal loss as a result of ATT/IDFA.

Advantage+ leads to higher returns

During the quarter, Meta further expanded its advertising offering through the Advantage+ platform, and launched Advantage Plus Shopping in August. Advantage+ is a machine learning-powered automated tool launched earlier this year that reduces the amount of manual input required and streamlines the launch of conversion campaigns.

The company noted that recent tests indicate that advertisers were able to increase ad spend by 32% through Advantage+ Shopping campaigns. Assume that Meta can continue to refine these AI/ML-powered ad products to achieve better returns for advertisers, similar to the positive momentum experienced by Google’s Performance Max. Given the attractive ROI profile, these tools can help increase advertisers’ willingness to increase ad budgets.

Cost discipline is key

Meta recently announced that it is reducing its workforce by 11,000 people, or ~13% of the company, across its family of apps and Reality Labs. The company noted that the reductions were already considered in its original 2023 spending outlook, but further refinement of the planning process brings 2023 spending from $96 billion-$101 billion to $94 billion-$100 billion and CAPEX from $34 billion-$39 billion dollars to 34 billion dollars. -37 billion dollars.

The operating cost reductions are favorable in light of Meta’s slowing revenue growth (which Zuckerberg attributed to a decline in e-commerce, the macro slowdown, increased competition and signal loss) and significant hiring increases in recent quarters. According to estimates, the reduction in headcount could remove ~$5 billion in costs annually.

While investors had hoped that the spending outlook for 2023 would fall more, the overall reduction in the labor force is likely to be larger than most people had expected. It shows that the management is operating with increased discipline, especially after a challenging almost two-week period since the reporting of the Q3 result.

Conclusion

After solid growth in 2021, the digital advertising industry is seeing cuts in advertising budgets this year and in 2023, and there are changes in competitive dynamics. As of now, the critical remaining top line for Meta’s ad business is primarily tied to cyclical macro headwinds rather than fundamental structural issues. As the overall macro environment improves, top-line headwinds related to the advertising business should ease.