• 1Q23 revenue and earnings modestly beat expectations on higher Ad sales. 1Q23 revenue/PATMI at 23%/20% of our FY23e forecasts.
• Investments in AI driving improvements in ad tech, with Reels user engagement and monetization starting to ramp up.
• Optimistic outlook with 2Q23e revenue guidance of 7% YoY growth at the midpoint (11% YoY top-end), while reducing FY23e total expense growth by 5%. Expectations for a final wave of headcount cuts in May 23.
• We increase our FY23e revenue estimates by 3%, and our FY23e PATMI/EBITDA estimates by 11% to reflect better-than-expected improvements in cost savings. We maintain NEUTRAL due to recent stock price performance, with a raised DCF target price of US$235.00 (prev. US$200.00), a WACC of 7.1%, and a terminal growth rate of 3.5%.

The Positives

+ 1Q23 results beat on both top and bottom line. META issued 1Q23 revenue of US$28.6bn, 3% YoY (6% YoY in constant currency), beating estimates by about 3%, and the top end of its own 1Q23e revenue guidance (US$28.5bn). This outperformance was led by a 26% YoY increase in ad impressions, and strong spend from Chinese advertisers’ outbound spending. E-commerce and Healthcare were the 2 leading contributors to YoY ad revenue growth. 1Q23 EPS of US$2.20 also beat estimates by ~10% as the company continued to show improvements in cost efficiencies as expense growth slowed to 11% YoY (4Q22: 22% YoY) – Sales & Marketing expenses were down 8% YoY.

+ AI continues to drive improvement in ad tech. Investments in AI capabilities continue to be the backbone driving product improvements. AI recommendations drove >24% increase in user time spent on IG, with Reels monetisation efficiency up >30% on IG, and >40% on FB. With the help of AI, we do expect the gap between Reels monetization vs Feed/Stories to continue narrowing, with META mentioning that this could reach neutrality by early 2024.

+ 2Q23e guidance of 7% YoY revenue growth showing potential pickup in growth trends. META issued optimistic revenue guidance for 2Q23e, with a range of US$29.5bn-32bn indicating a 7% YoY growth taking the midpoint, and a 11% YoY growth taking the high end of the range – implying some acceleration in revenue trends, with FX expected to also be less of a headwind moving forward.

The Negative

– Profit declined YoY, though less than prior quarters. META announced 1Q23 PATMI of US$5.7bn, -24% YoY, as expenses continued to grow faster than revenue (10% YoY vs 3% YoY), and a slightly higher tax rate of 22% vs 16% in 1Q22. However, YoY decline in PATMI was significantly better than prior quarters (3Q22: -52% YoY, 4Q22: -55% YoY), with a resumption in earnings growth on the horizon due to significant cost efficiencies and FX headwinds neutralising.