Meta turnaround could trap bears

Meta will report fourth-quarter earnings Wednesday afternoon, following Snap’s report after the bell Tuesday. The social-media-giant-turned-metaverse architect had an abysmal 2022 in the stock market, logging a 64% decline in its share price to shed some $600 billion in market value.

For Meta, the bear case has been predicated on a lot more than the general advertising slowdown that has also plagued Snapchat‘s parent. Competition at video-first platforms such as TikTok was heating up, while user growth at Meta’s legacy “Blue" Facebook platform seemed to be topping out. Skeptics regarded the pivot to the metaverse as a far-fetched moonshot project receiving an excessive amount of Meta’s investment dollars. And despite its massive size and scope, Meta’s ad business didn’t seem to be recovering from Apple‘s tracking changes as quickly as hoped.

The jury is out on whether the broader ad landscape is finally improving. But for Meta, the near-term outlook for ad spending may not matter all that much. For starters, the bar is low: Wall Street is forecasting Meta’s revenue will fall more than 6% from a year earlier in the fourth quarter—its steepest decline on record. Analysts aren’t forecasting a return to growth on that basis until the second quarter of this year.

Meanwhile, a Wall Street Journal report last week suggests many of Meta’s specific issues are being addressed. It is using artificial-intelligence tools to adapt to Apple’s privacy changes, the Journal’s report shows, enabling the company to make better predictions based on less data. The report also shows how Meta is shifting to forms of advertising less dependent on harvesting external user data, which Apple’s recent privacy changes have restricted. Executives told employees in October that Meta could begin rebounding from Apple’s changes as soon as the fourth quarter, according to the Journal’s report.

Meta had recently been generating just 18% of its revenue from ads based on first-party data, meaning data derived internally from user activity on the company’s own platforms, an internal presentation viewed by the Journal showed. Based on analysts’ estimates, that would equate to about $21 billion in revenue last year. By 2026, Meta’s presentation noted the company could see a further $18 billion to $25 billion being generated from its investments in those and other newly prioritized ad formats such as click-to-message ads, which invite you to message directly with brands. Baird analyst Colin Sebastian estimates such ads linking to WhatsApp and Messenger will generate nearly $12 billion in revenue this year—“equivalent to ~2.5 Twitters."

Meta may have spooked investors with plans to spend billions of dollars on what would be a “metaverse first, not Facebook first" future. But, as the Journal reported, most of the company’s AI targeting efforts involve optimizing its traditional social-media platforms, especially Facebook. This fits with Meta’s December blog post that the company is, in fact, still devoting 80% of its total investment dollars to improving its legacy business.

Those investments now seem to be bearing fruit. Per the Journal’s report, Facebook and Instagram are starting to see a path to recovery in terms of engagement, with a 20% gain in time spent in Reels consumption, in part driven by AI improvements. TikTok’s threat, meanwhile, could be starting to fade: The platform saw its revenue growth slow significantly last year, according to a Reuters report. And a new bill introduced in the Senate this month is now seeking to ban the app from all devices nationwide.

All of this could help explain why Meta’s shares are up about 18% so far this year, including a 3% rise on Friday following the Journal’s report. Wall Street analysts, too, are taking part in the sudden sentiment change: A UBS note out Monday referencing the Journal’s reporting noted an “easing in key overhangs." Jefferies is forecasting a revenue beat for Meta’s fourth quarter. And Bernstein is predicting Meta will outperform in the broader online ad space this year on the premise that digital-ad dollars will continue to be concentrated in “the largest and most advantaged ad platforms."

Your soul might not be having Facebook withdrawals, but your portfolio very well could be.