Reels, Meta Platforms' answer to viral short-form video app TikTok, elicited eyerolls when it launched in 2020 and was regarded as yet another example of Meta copying a popular rival.
But on Wednesday, Meta revealed numbers that show Reels
videos are growing rapidly among both users and advertisers and are quickly catching
up to the ByteDance-owned TikTok app that is beloved by young users and has
reshaped the social media landscape.
Meta shares surged nearly 8% on Thursday as a rosy revenue
forecast showed that artificial intelligence was helping the social media giant
boost engagement and ad sales even in an uncertain economy.
The Facebook owner was set to add about $60 billion to its
market value after strong second-quarter earnings encouraged 18 analysts to
lift their target price on a stock that has already more than doubled this
year.
"Meta (is) in a class-of-their-own in digital
ads," said Mark Shmulik of Bernstein, adding that its "monster
guidance blew the doors off with an expected growth rate of +15-24% — numbers
investors were hoping to maybe see as early as Q4."
While Meta's 12% rise in second-quarter ad revenue surpassed
the 3% growth at Alphabet's Google, earnings reports from both the digital ad
behemoths reinforced a recovery in the sector.
Meta and Google are on track to add around $160 billion to
their combined market capitalization - a figure that is more than the
individual market values of about 90% of the companies in the S&P 500
index.
Smaller rival Snap (SNAP.N), however, disappointed on ad
sales as advertisers stick to tried and true platforms.
Meta's results were also supported by improving monetization
of Reels, a short-form video format that is the company's answer to TikTok. CEO
Mark Zuckerberg said Reels now has an annual revenue run rate exceeding $10
billion, up from $3 billion last fall.
"Advertisers are gaining confidence in Meta's enhanced
and AI-powered campaign planning and measurement capabilities, and spending
more. Unsurprisingly, Reels monetization keeps improving," said
Morningstar analyst Ali Mogharabi.
The positive analyst view reinforces how a focus on cost
cuts and higher engagement through AI has helped Meta turn into a Wall Street
darling this year after being derided for much of 2022 for its hefty spending
on the ambitious metaverse.
Analysts have a median price target of $355.50 on Meta,
which represents an upside of 19% to its stock's last close. The company has
12-month forward price-to-earnings ratio of 21.28, higher than Alphabet's 20.47
and the industry median of 15.18.
The accelerating revenue growth at Meta helped allay some
concerns about an expected jump in expenses in 2024 due to legal fees and
increased spending on infrastructure considered key to the tech sector's
feverish AI race.
"There is an element of uncertainty in CapEx spending
growth for 2024. That said, we do also see a series of monetization
opportunities that can be sprung out of these innovations," said Mark
Mahaney of Evercore ISI.
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