• 2Q23 results were in line with expectations. 1H23 revenue/PATMI at 47%/43% of our FY23e forecasts.
• Double-digit growth in advertising after 5 quarters, outbound China spending and increasing Reels monetisation the main drivers. Guided 3Q23e revenue growth of 20% YoY.
• ~US$40bn in accumulated losses from Reality Labs and no timeline to profitability. A 12% drag on operating margin.
• We increase our FY23e revenue/PATMI estimates by 3%/2% to reflect a slightly faster recovery in advertising, and improvements in Reels monetisation. Additionally, FY23e CAPEX is cut by 10% due to delays in projects and equipment deliveries. Our WACC assumption of 7.1% remains unchanged, and our terminal growth rate assumption is increased to 4.5% (from 3.5%) due to higher ad monetisation rates. We upgrade to ACCUMULATE, with a raised DCF target price of US$360.00 (prev. US$235.00).

The Positives

+ Double-digit ad growth for first time in 5 quarters. Advertising revenue grew 12% YoY in 2Q23, led predominantly by growth in outbound e-commerce spending from Chinese advertisers. Engagement on META’s family of platforms also saw healthy trends as ad impressions grew 34% YoY, with AI-recommendations also increasing user time spent on its platforms by 7%. On the products side, Reels monetisation saw improvements, with an annual revenue run-rate of US$10bn vs US$3bn a year ago. Reels saw >200bn daily plays, with >75% of advertisers using Reels Ads.

+ Positive forward guidance, continuation of advertising trends. 3Q23e revenue guidance implies a 20% YoY growth at the midpoint, a significant expected acceleration in revenue due to several factors: 1) improving advertiser demand; 2) Reels continuing to increase monetisation due to higher ad load and incremental time spent; 3) 3% FX tailwinds vs 1% headwind in 3Q22; and 4) weaker 3Q22 comps (-5% YoY). 4Q23e is expected to be similar to 3Q23e with advertising demand recovering, albeit with a larger FX tailwind.

The Negative

– Committed to metaverse vision, no timeline for Reality Labs profitability. Losses continue to mount for Reality Labs segment, with expenses related to the launching Quest 3 next year a big drag. Operating loss for 2Q23 stood at -US$3.7bn, with accumulated losses of around -US$40bn so far. Reality Labs is currently a 12% drag on operating margins, and we think it will continue to be a drag for the foreseeable future.