Meta pivoting to focus on AI ‘that will help with the ad targeting’: Analyst

Edward Jones Senior Equity Analyst David Heger details Meta's latest round of layoffs, its position in the digital advertising market, and its refocus away from the metaverse and NFTs towards artificial intelligence integration.

Video transcript

SEANA SMITH: All right, well, let's also stick with tech here and talk about Meta. That stock closing up today, up just over 1%. Now, the move higher came after we got a bullish call from the Street. Edward Jones upgraded the stock to buy after Meta cut another 10,000 jobs. They announced those cuts last week.

We want to bring in David Heger, the analyst behind that call. He's Edward Jones senior equity analyst here. It's great to see you. So why are you more bullish on Meta given those cost-cutting efforts?

DAVID HEGER: Well, certainly the company is paying a lot more attention to its cost structure than it was even when we go back to when it reported earnings after the third quarter of last year. And at that time, the guidance that was given for expenses for 2023 reflected a pretty significant ramp up, and the market certainly did not react favorably to that news.

But since that time, the company has been taking a much stronger focus on the cost structure. And as a result now with the second announcement of layoffs, we've seen the midpoint of their expense guidance come down by about $8 billion. And as a result, you put that against, you know, the lower expenses, plus we feel that revenue should start to stabilize this year as we get through what appears to have been an online-ad recession where we've seen online-ad spending come down, and that's certainly affected Meta's revenue.

But as we move through the year, we think they move to the point where that stabilizes and potentially even starts growing again due to, you know, the stabilization in the ad market. Plus we see the impact of Apple's changes to its operating system, you know, where it required users to opt in on ad targeting. That had an impact on Meta, and we're past the worst of that. And then the reels feature and the click-to-messaging ads are both ramping in revenue, which should also start to help.

So now we see an improving earnings outlook as we go through the rest of this year and into 2024. So kind of the combination of stabilizing/improving revenue plus the lower expense outlook definitely helps the earnings picture.

DAVE BRIGGS: The exploding costs for quite some time were at least slated to be in the metaverse. How significant is the shift away from that, and where is the shift in focus going towards for Meta?

DAVID HEGER: Well, certainly that was one of the issues when they reported third quarter was about still being invested into the metaverse and the plans at that time, which seemed somewhat tone deaf to the environment in the online-ad spending. And so since that time, they are refocusing, and more of the spending is going to be towards artificial intelligence. That will help with ad targeting.

Certainly the company, in terms of targeting, had struggled since Apple made its changes to its operating system. And I think investors would much rather see the investment going that direction towards their core business and improving the growth on online-ad revenue.

SEANA SMITH: Yeah, and David, speaking about that, the ad-revenue focus, are you starting to see signs of stabilization there? Because that has been certainly an area of weakness for the company, as well as a lot of its competitors.

DAVID HEGER: Right. Yeah, and that's certainly been across the entire online-ad competitors as well. It was, I think, encouraging when the company guided for the first-quarter revenue where for several quarters when they guided, the outlook was below where consensus estimates were sitting. But coming into the first quarter, the guidance was much more in line, and even at the higher end of that guidance could indicate flat to even slightly up revenue year over year. Now, our estimates were still showing a slightly down quarter for revenue. But it was, I think, encouraging that we're getting closer to the bottom and perhaps moving to where we could start seeing growth as we move into, you know, second quarter and beyond.

DAVE BRIGGS: Do you factor in, David, a potential TikTok ban? What would that mean to Meta and to reels' growth potential?

DAVID HEGER: Well, certainly that's another factor that I think has been helping this stock lately. There's obviously a lot of news around a potential ban. And certainly nothing's certain on that front, but even if a ban isn't enacted, it seems as though that may be having some benefit to Meta just as advertisers may be more worried about spending on TikTok and the uncertainty around that platform, which even just that may help shift some more ad dollars towards Meta and certainly would help on the adoption on the reels platform for advertisers.

DAVE BRIGGS: Yeah, there was reportedly a meeting with TikTok and their biggest US advertisers in which reportedly they were not all that convinced that data is safe from the Chinese government.

David Heger, Edward Jones senior equity analyst, thank you, sir. Appreciate it.