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Meta - usership and revenue climb, offsetting higher legal costs

Meta's second quarter revenue rose 11% to $32.0bn, better than the 7% increase expected by the market...

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Meta's second quarter revenue rose 11% to $32.0bn, better than the 7% increase expected by the market. There was a 7% increase in the number of people using one of Meta's apps on a daily basis, to 3.1bn. Operating profit was 12% higher at $9.4bn. This took higher legal costs into account - reflecting the Irish Data Protection Commission fine.

Meta generated free cash flow of $11.0bn in the quarter which more than doubled, and had net cash of $35.1bn at the end of June.

The group expects third quarter revenue to be $32-34.5bn, with growth of 3% excluding exchange rates. Full year expenses are predicted to come in higher than planned, including restructuring costs. Looking beyond 2023, Meta expects expenses to grow as it looks to invest in growth areas including AI and the metaverse.

The shares rose 6.8% in after-hours trading.

View the latest Meta share price and how to deal

Our view

Meta has metamorphised. It's refocussed on the core business with exciting growth opportunities being nurtured in the background (more on those later).

This hasn't happened without pain, including a substantial restructuring. Efforts include laying off tens of thousands of employees. Job cuts are always regrettable, but from a strategic point of view the move makes sense as Mark Zuckerberg works to reduce the company's serious case of bloat. Making sure a business strategy is sustainable is always important, but that's especially true for Meta. The group relies on advertising revenue, and this is a tough place to be as consumer spending and confidence is suffering.

Meta's platforms are in a fierce competition for eyeballs, with younger entrants like TikTok a serious opponent. In such uncertain and difficult times, other big names are struggling because marketing teams spend less when things are tough.

Another big question mark from here is how the group will propel meaningful growth. Mounting competition, iOS privacy changes and difficulty monetising video content are all headwinds keeping those revenue expectations muted.

The difficulties ahead aren't lost on management, and that's where the grand metaverse plans come in. Unfortunately, the roll out and take up of the group's virtual reality products never really got going, despite the seemingly never-ending upwards spiral of the research and development budget. This is problematic because Meta doesn't have other income streams to fall back on, so as it stands, when advertisers turn off the tap, Meta's revenue funnel runs dry very quickly.

It's also pushing hard to drum up excitement for its AI capabilities, which now appears to be the focus for future investment. While things like AI-driven recommendations have the potential to keep attention on apps like Instagram for longer, the exact plan and margin connotations of AI are still a bit murky.

We're encouraged that spending on this untested product is set to be redirected to getting Meta's main house in order. But the Metaverse is still churning away in the background - it's not been given up. And we continue to think there could be exciting times ahead, it's just difficult to predict when the good times might roll - and there are likely to be ups and downs along the way.

Meta's valuation has seen a sharp revision upwards, and we share a lot of the enthusiasm. Billions of people use one of Meta's apps every day and its newfound focus is the right move. But the stock is likely to remain volatile, thanks to a combination of tough macro-economic conditions, and lingering confusion around plans for long-term growth.

Meta key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 27th July 2023