Not too long ago, Mark Zuckerberg's meta was the sick man of Silicon Valley. In February 2022, after 18 years of uninterrupted growth, the company reported its first ever drop in Daily Users
Users of Facebook fell by nearly 1 million in the final quarter of 2021. A few months later, meta announced its first-ever year-on-year decline in revenues for the second quarter of 2022, and then another in the third quarter, and another in the fourth quarter, coming to nearly 5% year-on-year.
At the same time, his revenues were falling, Zuckerberg was spending something like a billion dollars a month on Reality Labs, the company's metaverse division, which had already racked up over $25 billion in losses.
His apparent obsession with the idea and the fact that meta's premier metaverse app Horizon Worlds originally looked like a 2008 Wii game made Zuckerberg something of an international laughingstock and irked investors who unsuccessfully begged Zuckerberg to give up on it.
Meta stock duly fell by nearly 80%, reaching a 5-year low in November 2022, with its market capitalization falling from over a trillion dollars in mid-2021 to just over $300 billion.
They were Forced to sack 11,000 employees or about 13% of its workforce, with Zuckerberg publicly admitting that things weren't going to plan.
Today, however, a few days after meta's 20th birthday, things look completely different. After consistent revenue growth throughout 2023, on February 1st, meta published its earnings report for Q4, and well, it was pretty astonishing.
Despite warning of a potential slowdown in advertising revenue in their Q3 earnings, total revenue rose by 25% year-on-year to over 40 billion, and net profit tripled to $4 billion, both significantly higher than analysts' expectations. On top of these impressive numbers, Zuckerberg also surprised investors by announcing that meta would be paying its first dividend of 50 cents per share.
For context, dividends are a bit of a rarity in Silicon Valley, both because market capitalizations have been growing fast enough to satisfy investors, but also because it's sometimes perceived as desperate. When Microsoft started paying a dividend in 2003, for example, it was viewed as a sign that its rapid pace of growth was slowing.
Anyway, that's clearly not how meta's dividend was interpreted because just the day after the announcement, meta's stock rose by a ridiculous 20%.
Can meta's resurgence continue? Well, as we see it, meta's future depends on three things. First, advertising. Online advertising used to be mostly insulated from the wider business cycle, but this is less true today, which means that if the global economy goes into a recession, meta's revenues will probably take a hit.
According to Bloomberg, this means that meta's market capitalization jumped by $197 billion in a single day, the biggest ever one-day increase in stock market history.
Clearly, meta is back and stronger than ever. So in this blog, we thought we'd try and explain meta's return to glory and whether it can really last. So, as we see it, there are three reasons that meta is back in business.
First
- The first is some very effective cost-cutting in 2023. As well as cutting 13% of the workforce in late 2022, Zuckerberg also scrapped some of meta's more experimental projects, including an Apple Watch-style smartwatch, and bumped the price of certain existing products like the Quest 2 headset.
- This seems to have really worked for meta. Having declared 2023 to be what he described as a year of efficiency, in this month's earning report, Zuckerberg told investors he had a newfound appreciation for efficiency, saying, "I feel like we operate better as a leaner company" and that he didn't expect to hire too many more people going forward.
Second
- The second reason is a pivot away from the metaverse towards AI, at least publicly. In early 2023, in an attempt to placate investors, Zuckerberg said that the metaverse is "not the majority of what we're doing" and paused plans to hire 10,000 people in the EU to work on the metaverse. Instead, meta rode the AI boom triggered by ChatGPT's release in November 2022, making their large language model Llama 2 open source in July 2023 and announcing their first-gen AI-related gadgets, such as smart spectacles, in September.
- Meta was remarkably well-placed to compete in the AI wars because they had a pre-existing stock of data centers and graphics processing units (GPUs), which are required to meet the heavy demands of AI. Meta has also been working on rolling out AI chatbots on its platform to keep users engaged for longer and using AI to improve its algorithm for Facebook and Instagram Reels, where it's been remarkably successful.
Third
- While TikTok was pretty dominant in early 2023 and many analysts were originally skeptical of meta's ability to adapt to the new algorithm-driven, video-based social media landscape, a study from June comparing sister page's outreach suggests that the Reels algorithm is now more effective than TikTok's.
- But the place where meta is most effectively applying AI seems to be advertising. When Apple announced in 2022 that it was restricting meta's ability to track user data across third-party apps on iPhones, this significantly reduced meta's ability to predict user preferences and behavior, reducing annual ad revenue by something like $10 billion.
- Meta has apparently gotten around this by using AI to more effectively predict user behavior and preferences. And last year, they rolled out a new technology called Advantage Plus, which uses AI to automate ad campaigns, helping meta's ad revenue return to growth in 2023. But perhaps the main reason meta is back is because, well, it never really died. And in retrospect, rumors of its demise look overblown. Sure,