• 4Q23 revenue was a slight beat on better-than-expected ad revenue. PATMI was a huge beat on higher operating leverage and stronger topline growth. FY23 revenue/PATMI were at 102%/109% of our FY23e forecasts. PATMI grew 3x YoY as expenses declined 8% YoY despite the revenue jump. Its 35% net margin was close to pandemic highs of ~40%.
• Reels finally contributing net revenue to META, driving >25% YoY growth in daily watch time across all video platforms, and were re-shared 3.5bn times daily.
• META is intensifying its capital investments, with plans on having compute worth about ~600K H100 GPUs by end-FY24e to support long-term AI development.
• We raise our FY24e revenue/PATMI by 3%/9% on stronger ad revenue and a leaner cost structure. We expect META to benefit from the recovery in digital advertising, and also to lean on AI for product improvement and efficiencies which we expect will turn into greater value for advertisers. Due to recent price movements, we downgrade to an ACCUMULATE rating from BUY, with a raised DCF target price of US$520 (prev. US$375) as we roll over an additional year of valuations. Our WACC/g assumptions remain unchanged at 7.1%/4.5%, respectively.

The Positives

+ Beat on both top and bottom line showing year of efficiency has played out well. Revenue of US$40.1bn beat our estimates by 7%, driven by a 3% FX tailwind, a 21% YoY growth in ad impressions, and a 2% YoY increase in average price per ad (CPM). CPMs grew for the first time in 2 years, driven largely by APAC+China demand. 4Q24 PATMI increased 3x YoY to US$14.0bn, as META benefitted from strong revenue growth and a much leaner workforce – headcount/total expenses were both down 22%/8% YoY, respectively.

+ Well-positioned to build the most advanced AI products with a stockpile of GPUs. META remains focused on building out its tech infrastructure, stating that it intends to have the equivalent of ~600K H100 GPUs (350K H100s + remaining 250K of other GPUs) worth of computing power by the end of FY24e. This is enough compute to support Reels, and another Reels-sized AI service. In addition, its open-source software infrastructure should help attract top AI talent to develop Llama models and other AI products.

+ Reels commentary positive, contributing net revenue to META. In 4Q23, Reels drove >25% YoY growth in daily watch time across all video types, with Reels re-shared 3.5bn times a day. Historically, Reels growth has been a headwind to overall revenue growth due to its lower monetisation levels. However, it is starting to contribute net revenue to META, with the company further expecting Reels to leverage a unified recommendation system across all META patforms to drive further views and engagement.

The Negative

– Raised top end of FY24e CAPEX guidance. META raised the top end of its CAPEX guidance for FY24e by US$2bn, to US$30bn-US$37bn, indicating it expects the need for higher levels of server capacity to support more intense AI product development. We raise our FY24e CAPEX by 3% as a result.