Meta Finally Figures Out How to Sell the Metaverse

Meta Platforms, helmed by CEO Mark Zuckerberg, reported the company’s first-ever dividend.
Meta Platforms, helmed by CEO Mark Zuckerberg, reported the company’s first-ever dividend.

Summary

Facebook parent’s ad business is booming again, while AI gives better cover to its capital-spending surge. Buybacks and a new dividend don’t hurt either.

The last time Mark Zuckerberg signaled plans to open his wallet, his shareholders bailed. What a difference two years makes.

Meta Platforms saw its share price jump 20% Friday following strong fourth-quarter results that included a significantly boosted share buyback and the company’s first-ever dividend. It was a significant bump for a stock that had already nearly tripled in value during 2023. The recent gains have also put Meta’s market value back above $1 trillion, in the rarefied ranks of Apple, Microsoft, Amazon, Nvidia and Google-parent Alphabet.

The company once known as Facebook was unceremoniously booted from that club in late 2021 when Zuckerberg first started signaling his interest in the metaverse, loosely defined as a virtual world accessed mainly through virtual and augmented reality devices. Shareholder worries grew as the company took drastic steps that included changing its name to Meta and boosting its annual capital-expenditure, or capex, budget by nearly 80%. Virtual reality had so far been a dud of an industry. But as Facebook’s chief executive officer and controlling shareholder, Zuckerberg had little to stop him from chasing the dream.

So investors voted with their feet. Meta’s fourth-quarter report in February of 2022 included a dim outlook for its advertising business, which was slowing rapidly to single-digit growth following a pandemic bump. That cost the stock more than a quarter of its value in a single day, and the fallout wasn’t over. By November of that year, Meta’s market value had bottomed at around $237 billion—78% below its peak just a little over a year earlier.

Zuckerberg got the message, launching a “year of efficiency" that cut the company’s head count by 22% during 2023. But Meta isn’t exactly getting parsimonious. Besides the aforementioned buybacks and dividend, the company used its fourth-quarter report Thursday to raise the high end of its capital-expenditure forecast by $2 billion, to $37 billion for this year.

The boost was credited to the company’s data center build-out as well as the need for servers and other components for AI. Zuckerberg said on the call that he expects to have about 350,000 of Nvidia’s expensive and hard-to-come-by H100 chips powering his network by the end of the year.

Microsoft, Google and Amazon also signaled plans to increase capex this year to build out their own AI capabilities. Still, $37 billion would be a sizable outlay for Meta, coming only 10% below what Wall Street projects for Google’s parent this year. That company still generates more than twice as much annual revenue.

Meta is also hiring again, which Chief Financial Officer Susan Li said Thursday “will further shift our workforce composition toward higher-cost technical roles." And Zuckerberg hasn’t given up on the metaverse: During the company’s earnings call, he referred to AI and the metaverse as “two major parts of our long-term vision."

Wall Street isn’t worried this time. “This ain’t your father’s FB," wrote Mark Mahaney of Evercore ISI, noting Meta’s reduced cost structure, improving ad-revenue growth and shareholder-friendly moves, such as the dividend. Rohit Kulkarni of Roth MKM said the dividend would bring a “bigger unlock of a new category of shareholders" that could drive the stock even higher. Mark Shmulik of Bernstein was more succinct: “This quarter should leave investors with a simple takeaway: TRUST ZUCK."

That trust will likely hold so long as the right numbers keep moving in the right direction. Advertising revenue—which fell on a full-year basis for the first time ever in 2022—rose 16% in 2023, picking up as the year went on. The operating margin in the company’s core family of apps segment jumped 10 percentage points to 47% in 2023, reflecting the improved financial performance of products such as Reels. And the Reality Labs unit that houses the company’s metaverse efforts even had a surprising jump in revenue in the fourth quarter, crossing the $1 billion mark for the first time, thanks to strong sales of the company’s Quest VR headsets.

That business is still a costly one, incurring an operating loss of more than $16 billion in 2023. And Meta faces plenty of other risks, including growing reliance on Chinese e-commerce players such as Temu for advertising, plus the now ever-present prospects of political scandals and regulation. But a leaner cost structure helps absorb speculative investments. And, despite their recent run, Meta shares closed Friday at 24 times forward earnings—a discount to all the other trillion-dollar techs save for Alphabet.

Facebook’s parent should keep more friends this time.

Write to Dan Gallagher at dan.gallagher@wsj.com

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