The Daily: Why Meta investors remain somewhat skeptical, even as profitability climbs

Audio by Marcus Johnson, and Jasmine Enberg | Nov 7, 2024

Episode Transcript:

Marcus Johnson (00:00):

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Jasmine Enberg (00:17):

It is something for advertisers and investors to be keeping an eye on because as user growth slows, it means that Meta is going to have to squeeze more revenue out of its existing users. The good news, of course, is that it's pretty well positioned to do so.

Marcus Johnson (00:39):

Hey, gang. It's Thursday, November 7th. Jasmine, listeners, welcome to the Behind the Numbers Daily, an EMARKETER podcast. I'm Marcus. Today I'm joined by our vice president and principal analyst who covers everything social media for us based in California. It's Jasmine Enberg.

Jasmine Enberg (00:54):

Hey, Marcus. Hey, everyone.

Marcus Johnson (00:56):

Hello there, miss. So we start with the fact of the day. I have another Finnish one for you.

Jasmine Enberg (01:02):

No way.

Marcus Johnson (01:03):

It's getting pretty tough at this point, okay?

Jasmine Enberg (01:05):

Two in a row.

Marcus Johnson (01:05):

This is the last one. Jasmine's from Finland. That's the background. So Finnish people have a secret cupboard ...

Jasmine Enberg (01:14):

For dishes?

Marcus Johnson (01:14):

Above their sink. Above their sinks. Why did I not know about this? So clever.

(01:21):

All right, so in the kitchen there's a specific cupboard above the sink called, don't worry Jasmine, I've got it covered for you, so just in case you're wondering how to pronounce it, Asteankuvoskopi.

Jasmine Enberg (01:30):

Astiankuivauskaappi.

Marcus Johnson (01:35):

Nailed it. Wow.

Jasmine Enberg (01:37):

Wasn't bad to be honest.

Marcus Johnson (01:38):

So that's how you say it in Finnish. It's an empty net, shelf or a kitchen rack basically where you put dishes to dry and then ... So it's above the sink. You wash your dishes, you put them on this rack in this cupboard above the sink, and then the water drops fall back into the sink. Genius. Why the hell is everyone else not doing this?

Jasmine Enberg (01:57):

I wonder if it's because ... Actually I don't even know if this is true. I wonder if fewer people in Finland have dishwashers.

Marcus Johnson (02:03):

Oh. Is that what it is? The rest of the world is just lazy? Probably. That sounds about right. But if you had to wash a dish, this is how it's done. Anyway, today's real topic, why Meta investors remain skeptical even as profitability climbs?

(02:25):

All right, Jasmine talking Meta today. Let's start with the news that Meta is reportedly developing its own AI search engine aiming to reduce its reliance on Google Search and Microsoft Bing within its platforms, Gadjo Sevilla was noting. He writes: The social media giant is planning to use AI powered search for real-time answers across its ecosystem, including Facebook, Instagram, and WhatsApp without third party dependencies per the information.

(02:51):

So what do you make of this new AI search initiative from Meta Jasmine?

Jasmine Enberg (02:56):

Well, it's a logical move for the company. Meta AI currently uses Google and Bing, which as you mentioned means it's dependent on two of its big tech competitors and decreasing that dependence is certainly smart. Of course, its success is going to depend pretty heavily on how good the technology is.

(03:15):

I think long-term, a search engine also gives Meta new services to monetize and through search ads specifically. And that could help boost its revenues, also put more pressure on Google because we already know that social has become a major search tool. And one of the things that we on the social desk are thinking about predicting for 2025 is that ad budgets are going to start to follow consumers as more social search ad options become available next year.

Marcus Johnson (03:44):

Okay. I mean, lots of folks already using search platforms to search for things. This AI search engine initiative could drive those numbers even higher. Some numbers here, 42% of Americans using social platforms to find information. That's 22 points behind those who use search engines, which is in first place. But when you look at young people, Gen Z folks, 46, even more, 46% using social platforms to find information. That's just 12 points behind the share of people who are using, young people who are using search engines. Those numbers from GWI as of March of this year.

Jasmine Enberg (04:20):

And it's not just information, right? It's also products and services. So the opportunity here, especially for brands and retailers could be really big.

Marcus Johnson (04:30):

Yeah, yeah, absolutely.

(04:31):

So Jasmine, despite this though, investors don't seem convinced of Meta's trajectory. And I say that because its share price fell seven points in the days following its Q3 earnings, likely because RealityLabs, its VR division lost another $4 billion. Now has an annual operating loss of 16 billion. But Meta's saying that it wants to continue to ramp up its capital expenditures to take advantage of the AI opportunity that it sees in front of it.

(04:59):

There's a note from Geoffrey Seiler of the Motley Fool and shows no sign of slowing down in terms of that investment. Meta anticipating a significant acceleration in infrastructure expense growth in 2025 as it continues to invest in building new data centers and other AI related costs.

(05:16):

I guess the one thing that Meta's got going for it is that everyone's doing this, and which takes the sting out of the cost, right? Google said it spent $13 billion on CapEx in Q3. That's largely data centers and AI chips. And so even though Meta is pouring a ton of money into VR and the metaverse, they're now saying they're going to pour a ton of money into AI.

(05:36):

Investors, they're a bit nervous. But what are you going to do? We spoke about this on the Snapchat episodes. AI is kind of table stakes at this point, so.

Jasmine Enberg (05:44):

Yeah, and investors are understandably skeptical. And I wouldn't say that they don't necessarily believe in the trajectory for Meta, but they did get a little spooked. And a lot of that had to do of course with the growing costs associated for AI in 2025. They're still waiting for a return on investment on some of those bigger bets. And there's no real indication that the return will be enough to justify the massive amounts of spending, which Meta also hasn't put a number around.

(06:14):

And I think one of the things that we spoke about last quarter is that the more color Meta can provide, the better investors will be able to understand the extent of these investments. And to your point too, it is an area that Meta has to invest heavily in, but it does need to make sure that it keeps up the revenue growth because any weakness in its core business, and we'll see investors become even less patient with that spending.

Marcus Johnson (06:40):

Yeah. As I mentioned, share price fell seven points in the days following its Q3 earnings. Let's take a look at those a bit more closely. We'll start with the users. Meta stopped reporting on Facebook users, never gave away the Instagram ones. Every now and again, might throw them out in the press release, but they hadn't reported on those regularly in their earnings.

(06:59):

Anyway. But we used to get Facebook numbers every quarter, daily, monthly, but they stopped reporting on Facebook users at the end of last year. So Q4 of last year was the last time we got those. But we do have Meta's total daily user figure. So that's the number that includes Facebook, Instagram, WhatsApp, and Messenger. All of those platforms combined into this, what they call daily active people number, or I've called it here Meta's total daily user figure.

(07:26):

That grew and its slowest rate though Jasmine in two years in Q3 at less than 5%, now at basically 3.3 billion, 3.29. What's your take on this slowdown in total daily Meta user growth?

Jasmine Enberg (07:42):

So it's not necessarily surprising when Meta stopped reporting those Facebook only user figures and switched only to this one metric, it was a way for the company to hide any weakness in Facebook user growth that we knew was there. I imagine that Facebook was responsible for a lot of this slowdown in growth, although I wouldn't be surprised to see that Instagram contributed as well. Part of that is because it's natural at this point, given how massive both Facebook and Instagram are in terms of their audiences.

(08:15):

But it is something for advertisers and investors to be keeping an eye on because as user growth slows, it means that Meta is going to have to squeeze more revenue out of its existing users. The good news, of course, is that it's pretty well positioned to do so if you think about all the positive engagement trends that we're seeing across its apps, and a lot of that has to do with its AI powered tools that are showing people more of what they like. And it's also well positioned to do so because we're seeing strong growth in its ad revenues, which is also being boosted by AI.

Marcus Johnson (08:53):

Yeah. Yeah, you mentioned Meta needing to squeeze more money out of the folks that it has doing a decent job of that. Average revenue per Meta user, so that includes, as I said, Facebook, Instagram, WhatsApp and Messenger, average revenue per Meta user up 12% year-on-year, which is pretty impressive.

(09:10):

When you look at the platform as well, we forecast all of these numbers that Meta has, all of their platforms, and I looked just at the US, its most lucrative market. And yeah, our own estimates suggest that Facebook has been losing a few hundred thousand users each year since 2020. So that's not new. So a lot of them, a lot of people using Facebook.

(09:32):

Instagram, on the other hand, has been more than making up for those losses, adding around 6 million people a year in the US over that same timeframe. And then I just pulled up our WhatsApp users in the US. That's basically flat. Well, it's actually increasing a little bit by a few hundred thousand each of the next couple of years. And also same with Messenger. That's ticking up ever so slightly.

(09:53):

So the numbers in the US look pretty solid. It's just Facebook which is going down a fraction, but the other platforms are more than making up for it.

(10:00):

Let's talk about the dollars, Jasmine. Meta made basically 40 billion, but 39.9 to be specific, $39.9 billion in ad revenue in Q3. That's a growth of 19%, down a touch from the 24% growth it saw in the same period a year ago.

(10:17):

We'll play slice the pie for this question. So you've created a pie chart for us as to the reasons, three max, why Meta was able to grow revenue 19% in Q3, closing in on that $40 billion for the quarter.

Jasmine Enberg (10:29):

So I have three slices in this pie, and I think they're actually probably pretty similar to last quarter's, but the first slice is the overall digital ad landscape. We're seeing ad spending grow healthily, but the dollars aren't totally free flowing. And whenever that happens, advertisers turn to tried-and-true easy-to-use platforms like Meta with massive audiences.

(10:50):

The second slice is AI, which we talked a little bit about, but just to put some figures around how it's already boosting engagement on the platform, which is of course something that advertisers are looking for is that Meta said that AI-driven feed and video recommendations have led to an 8% increase in time spent on Facebook and 6% increase on time spent on Instagram. Then of course, you have some of the AI powered ad formats including Advantage+, which were also called out during the earnings call as helping to drive some of the revenue.

(11:24):

And the third slice I would say is commerce. Meta called it out again as being the largest contributor to year-over-year growth followed by healthcare and entertainment and media. When you're looking at this by vertical, the one thing to look out for here, and something that we've been looking for in most of the recent earnings calls is China-based advertisers. They're a huge part of commerce advertising on the platform, and they were mentioned on the earnings call as contributing to Asia-Pacific being the slowest growing region in Q3.

Marcus Johnson (12:00):

Interesting. Okay. And are these shares roughly equal? Is one bigger than the other?

Jasmine Enberg (12:04):

Ooh, good question. I'll say roughly a third each.

Marcus Johnson (12:08):

Okay. Okay. Pretty even then.

(12:09):

The one thing that jumped out to me in terms of the money they're making, and this it seems like a positive, Meta's 2023 year of efficiency has continued very much so into 2024. Net income averaged over $13 billion each of the last five quarters now. The five quarters before that, it was averaging half as much in terms of net income at less than 6 billion a quarter. So a huge turnaround there in terms of profitability.

(12:39):

They did mention Jasmine that Threads, their Twitter or X competitor reached nearly 275 million monthly active users in Q3 adding around 1 million new folks a day in the quarter. What should we make of Threads at this point?

Jasmine Enberg (12:55):

So 275 million monthly actives is not a small number by any means, but it says very little about engagement and executives didn't either on the earnings call except to say that it was "good". And if you put that 275 million into context, it means that Threads' monthly user base is less than a fifth of that of Instagram worldwide and still 83 million monthly users smaller than X, which has actually been surprisingly resilient, both in terms of users and engagement.

(13:29):

And when you're thinking about that good engagement they were talking about, I imagine a lot of that in Q3 has to come from the cross-posting feature that was rolled out I think in August that allows users to cross post from Instagram and Facebook directly to Threads.

(13:48):

The other thing on the earnings call that stood out to me about Threads is that we're still waiting on monetization. Meta said that it didn't expect Threads to be a meaningful driver of revenue in 2025. That does not mean that ads aren't coming. I expect they will.

(14:03):

I do get a lot of questions about it from advertisers, and for the most part though, I take that more as part of this growing need or desire to diversify their platforms rather than a burning need to be on Threads specifically. But I do imagine that demand will ramp up once those ad options are available again because of that need to diversify and the easy integration into Meta's ad ecosystem.

Marcus Johnson (14:29):

Yeah. What else are you paying close attention to when it comes to Meta?

Jasmine Enberg (14:34):

So one of the things that I've been paying close attention to recently is business messaging, particularly on WhatsApp. Meta called out other revenue growing at 48%, and that is coming primarily from business messaging. It has been really focused on that initiative recently. A part of that has to do with the need to find new ways of bringing in revenue from its existing users, which we talked about.

(15:04):

I think most of these features are on WhatsApp, if not all of them. And WhatsApp isn't as popular here in the US as it is in other countries. So I don't expect it to be as big of a driver of revenue, but it's certainly something that's ramping up and it is a high priority for the company.

Marcus Johnson (15:24):

Yeah. Yeah, it's not the most dominant platform, but I mean at this point, 20% of the country using it, which is not a small number of people. That's 68 million Americans using it and continuous steady take up. It almost seems like it's starting to plateau according to our figures, but that's still a lot of people. One in five people, WhatsApp folks.

Jasmine Enberg (15:44):

Well, I think the challenge is getting businesses to use it, right?

Marcus Johnson (15:47):

Yes.

Jasmine Enberg (15:48):

That's where the monetization comes in. And so there has been a lot of growth in consumer usage, especially through things like group chats. I'm anecdotally personally in many group chats on WhatsApp with people in the US, which is something that I hadn't really experienced before this year, but-

Marcus Johnson (16:05):

Finally coming around. Oh God, America.

Jasmine Enberg (16:08):

Getting people to communicate with businesses and then being able to charge those businesses for that communication is the hurdle that Meta still needs to overcome here.

Marcus Johnson (16:17):

Yeah.

(16:18):

All right. We close out the episode with a grade for Meta because we've been talking about their Q3 performance. What grade would you give the company?

Jasmine Enberg (16:27):

I'm going to give it a B+ this quarter. It beat on revenue, but it missed on users, and Meta did not do as good of a job as it could have in easing investor concerns about its AI spending next year.

Marcus Johnson (16:41):

Okay. Very nice. It's a little bit down from where it was earlier this year, an A handed out previously, but still pretty impressive, B+. Can't argue with that.

(16:52):

That's all we have time for for this episode. Thank you so much Jasmine for hanging out with me and the listeners today.

Jasmine Enberg (16:57):

Thanks for having me.

Marcus Johnson (16:57):

Of course. Thank you to Victoria who edits the show, Stuart who runs the team. Sophie does our social media. Thanks to everyone for listening in. Tune tomorrow to listen to our Behind the Numbers Weekly listen show, an EMARKETER video podcast.