Thoughts on META 2023 Q2 Earnings

META's Q2 2023 earnings report shows a steady recovery in performance, meeting expectations and impressing investors who have been closely monitoring the company. Given the robust user and financial metrics in the previous quarters, it was expected that Q2 would show an improvement over Q1, which is consistent with the performance of industry peers like Google, Microsoft, and Snap. META's Q2 net profit, after factoring in one-time restructuring costs, reached a historical high of $10.438 billion, even amidst the backdrop of intense competition in the metaverse space. The report highlights the company's solid growth in user base and impressive financial indicators, making it a strong contender in the social media and communication markets.

 

1) User Metrics:

META's Daily Active Users (DAU) reached 2.06 billion, with a net increase of 20 million compared to the previous quarter's 40 million increase. However, Monthly Active Users (MAU) grew to 3.03 billion, showing a net increase of 40 million, surpassing the previous quarter's 30 million net addition. The DAU/MAU ratio was reported at 67.99%. Additionally, META's Directly Addressable Population (DAP) reached 3.07 billion, with a net increase of 50 million, and the Monthly Addressable Population (MAP) rose by 700 million to reach 3.88 billion. These numbers indicate significant user growth, especially considering the already high user base in the previous quarters. META's four flagship products – Facebook, Messenger, Instagram, and WhatsApp – demonstrate strong stickiness and competitiveness, comparable to other leading platforms like WeChat. The company's Twitter-like product, Threads, is also reported to be performing well, although specific data was not disclosed.

 

2) Revenue and Profit Metrics:

In Q2 2023, META's revenue amounted to $31.999 billion, showing a year-on-year growth of 11.02%. The revenue recovery exceeded 10% and came close to the upper limit of the previously projected range of $29.5 billion to $32 billion. Net profit for the quarter reached $7.788 billion, reflecting a year-on-year increase of 16.46%. If we include one-time restructuring expenses of $1.87 billion and $780 million, respectively, the net profit for the quarter would be a remarkable $10.438 billion, marking a year-on-year growth of 56.09%. This figure surpassed the company's historical high Q2 net profit of $10.394 billion recorded in 2021. META's profitability is truly impressive, with the gross profit margin improving from 78.68% to 81.42% quarter-on-quarter, and the operating profit margin surging to 29.35% from the previous quarter's 25.23% and the one before that at 19.89%.

 

3) META vs. the Metaverse:

Comparing META's financial performance to the broader metaverse market, the company stands out for its profitability, especially when considering the significant losses reported by other metaverse companies. META's robust earnings capacity is evident, with the potential to earn nearly $3 billion more in a single quarter than the entire metaverse market's net loss of $3.739 billion. From a valuation perspective, META's current market capitalization of $812 billion (factoring in a 6.14% after-hours increase) gives it a price-to-earnings ratio of less than 20 times when considering the metaverse's hypothetical zero valuation.

 

4) Stock Buybacks:

During Q2 2023, META repurchased $793 million worth of Class A common stock. As of June 30, 2023, the company has approximately $40.91 billion in available funds and authorization for future share buybacks.

 

5) Guidance:

For Q3 2023, META expects total revenue to be between $32 billion and $34.5 billion.

 

6) Valuation and Conclusion:

Based on the current stock price of $319 (after-hours), META's market cap is approximately $812.1 billion, with a trailing twelve-month (TTM) net profit (including one-time expenses) of $30.5 billion, resulting in a TTM price-to-earnings ratio of 26.6. Considering the stickiness and growth of its user base, along with the recovering revenue growth, it is reasonable to expect META to achieve its historical high TTM profit of $40.3 billion (recorded in Q3 2021) within the next 2-3 years. The current Q2 net profit already attests to a historical high (including one-time expenses), making an optimistic outlook well-founded. Therefore, the current valuation appears reasonably undervalued for long-term investors, given the company's strong performance and future potential. However, the dynamic nature of the metaverse market introduces various uncertainties that should be carefully considered when evaluating potential returns.