Meta stock (META) ripped higher on Thursday, rising as much as 9% while investors celebrated the company's better-than-expected second quarter results and a forecast for higher revenue than Wall Street had anticipated for the current quarter.
Shares of the Facebook parent company are now up more than 160% on the year and trading at their highest levels since February 2022. But ironically, Meta's rally hasn't been driven by the metaverse.
Meta's metaverse bet, realized under the Reality Labs line of its revenue, contributed to less than 1% of the company's overall revenue and lost $3.7 billion in the second quarter. Meta expects those losses to accelerate in 2024.
"The metaverse stuff I think we've talked about for a while," Meta Founder and CEO Mark Zuckerberg said. "So I don't think there's much change there except I'd say the signals that we're getting from the market are it's certainly not getting adopted a lot faster than we expected, so that's sort of the somewhat sobering signal."
Facebook announced its name change to Meta in October 2021. The stock closed that day at $316 per share. A year later, the stock price was under $100 as investors dumped shares and the company's net income plummeted.
Zuckerberg and Meta have built the 2023 comeback around the "Year of Efficiency." The company has reduced its headcount and focused on cost-cutting while also getting back to what it's always done best: driving engagement and innovating on its social media platforms.
Zuckerberg and Meta CFO Susan Li highlighted throughout the company's earnings call that the metaverse remains a tech wave they want to ride "over the longer term." In the meantime, the new tech buzzword, AI, is providing more tailwinds.
Revenue hit $32 billion for the quarter, up 11% from last year. The company projected current quarter revenue of $32 billion-$34.5 billion, more than the $31.2 billion expected by analysts.
Li pointed to higher engagement from users as a key source of revenue growth, including Meta's success with Reels. AI is driving some of those improvements.
Recommended content from accounts users don't follow is the fastest-growing content category on Facebook's feed, per Zuckerberg. Those recommendations have driven a 7% increase in time spent on the platform.
In addition to Reels, Zuckerberg noted the success of the company's AI-driven automated ad products known as Meta Advantage. "Almost all our advertisers are using at least one of our AI-driven products," he said on the company's earnings call.
"Investments that we've made over the years in AI, including the billions of dollars we've spent on AI infrastructure, are clearly paying off across our ranking and recommendation systems and improving engagement and monetization," Zuckerberg said.
Wall Street remains largely bullish on Meta despite the stock's rally in 2023. There are 53 Buy ratings, nine Holds, and two Sells on Meta, per Bloomberg. Largely, analysts that are bullish on the stock see Meta's ability to increase engagement on its consumer-facing apps, such as Instagram, as a positive tailwind for future revenues.
"Meta's considerable AI investments over the past couple years are paying off as AI-generated content drives incremental engagement," JPMorgan analyst Doug Anmuth wrote in a note on Thursday.
He added: "Importantly, despite ramping investments, we believe Meta can still drive higher EPS given revenue upside and previously established cost efficiencies."
But some on the Street are still concerned with the focus on the metaverse in the long term. Zuckerberg spent time on the call once again explaining the vision, noting that the "1 billion or 2 billion" people who have glasses today will someday be wearing smart glasses. He discussed Meta's mission has always been to build "awesome experiences" that help people connect with one another, and the metaverse could play in a role in that.
Needham analyst Laura Martin is one of the investors that's still skeptical Meta can overcome its metaverse spending.
"We worry about META's enormous investments in the metaverse," Martin wrote. "Meta talks about the returns on its metaverse investments in terms of 2030, well beyond most investors' time frames. We would argue that there is no need to be in META today if its metaverse spending will only pay off (maybe) in 2030."
But with the stock up over 150% this year and revenues roaring higher, Zuckerberg and Meta are betting that they can invest for both 2023 and 2030 all at once.
"I think we've shown that we can deliver good business results in the near term while investing ambitiously in the long term," Zuckerberg said. "So I'm planning on continuing to do that, and I do continue to believe that over time, we will be happy that we did that."
Josh Schafer is a reporter for Yahoo Finance.
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