The secret weapon of Meta Platforms (NASDAQ:META) is most likely not the metaverse, but rather Facebook and Instagram Reels. While the market hasn’t been too happy with Meta stock since the beginning of this year, there’s a sign that a recovery is on the way, as the last earnings report revealed that Meta’s Reels product is gaining traction and could help the company weather the current storm.
Even though the digital ad market is in a cyclical decline and there’s a good chance Meta’s business won’t grow much this year or its metaverse initiatives will remain unprofitable, Reels allows the company to compete on an equal footing with TikTok and potentially gain market share from it. Reels has the potential to help Meta enhance its position in the video section of the digital ad market in the next years. As a result, it could be a perfect moment to hold a position in Meta stock, as if Reels continues to perform well, the company’s price could appreciate in the next quarters.
Meta Q3 Is Quickly Approaching
Meta had an unquestionably awful start to the year. Following a string of poor results in recent quarters, Meta stock has fallen 60% year to date and is currently trading near its 52-week lows. However, the company will announce its third-quarter results later in October, and there is a chance that some of the company’s key metrics will improve. After all, even if Meta generated just $28.82 billion in revenue in Q2, down 0.9% year on year and $130 million less than expected, its active user base has grown, with DAP and MAP at 2.88 billion and 3.65 billion, up 4% year on year and 4% year on year, respectively.
At the same time, the market does not expect Meta to perform well in Q3, as its quarterly guidance was reduced a few months ago to $26 billion – $28.5 billion in expected revenues during the quarter, which is lower than the street estimate of $28.94 billion, owing to a volatile macroeconomic environment. As a result of the comparatively low expectations, Meta stock has considerable room to surprise everyone and beat its conservative guidance.
All Eyes Are on Reels
Reels are one product that could help Meta boost its success not only in Q3 but also in subsequent quarters. Reels are full-screen vertical videos created by content providers on Facebook and Instagram, comparable to those made on TikTok. Meta can successfully monetize them due to its engaging way of interacting with people by giving advertisers the chance to place Reels-type advertising on both Facebook and Instagram. Reels has gained traction recently and is on target to deliver $1 billion in annual income for Meta.
At the same time, there are reasons to believe that the short-form video segment will continue to attract new users and advertisers. Some reports claim that TikTok’s parent company ByteDance is on track to generate $11 billion in advertising revenue this year, surpassing the combined revenues of Snapchat (NASDAQ:SNAP) and Twitter (NASDAQ:TWTR). Furthermore, its yearly revenue is expected to reach close to $24 billion by 2024, which is $5 billion less than what YouTube generated last year.
Considering this, it’s safe to assume that Reels has a good chance of assisting Meta in improving its metrics and expanding its presence in the rapidly increasing short-form video segment in the near future, given the impressive rate at which its immediate competitor TikTok is expected to grow.
Furthermore, while Reels are not as popular as TikTok at this time, there are reasons to assume that Meta has some significant advantages that will allow it to compete on an equal footing with ByteDance in the short-form video space. To begin with, Meta has a larger war chest and a more solid bank sheet than ByteDance, which continues to bleed funds to fund its expansion. At the same time, one of TikTok’s significant downsides is that it does not adequately reward its content creators, who receive substantially less cash than on other video platforms.
While ByteDance has attempted to address this issue by introducing the TikTok Plus program, which splits earnings in half with its creators, only a small percentage of the most popular creators are qualified for such a revenue share arrangement. As a result, creators are always enticed to explore other platforms where they can publish similar short-form video material and earn substantially more.
That’s why Meta has been actively exploiting this issue, first by developing its own revenue share agreement with a reduced barrier of entry in which creators earn 55% from overlay advertisements in Reels, and then by introducing a bonus program in which creators can make additional cash. Furthermore, Meta said a few days ago that it would be adding new features to Reels to attract more users and advertisers.
Given all of this, Reels could help Meta improve its performance in the coming years and mitigate the impact of Apple’s (NASDAQ:AAPL) decision to change its privacy policy, as there’s evidence that a short-form video segment would continue to gain momentum and attract more advertisers.
New Possibilities for Meta
Meta can extend its footprint in the larger video segment by promoting and investing in Reels, which already has the highest average ad expenditure per user in the global digital advertising business compared to other segments. At the same time, given the amount of revenue TikTok alone is expected to generate in the coming years, we can assume that Meta has a good chance of expanding the monetization opportunities of Reels and becoming one of the leaders in the full-screen vertical video segment, based on the recent initiatives described above. All of this will almost certainly result in additional shareholder value in the coming years.
The main disadvantage of Reels is that even if it generates $1 billion in income for the company, it will still be a drop in the bucket, given that Meta is predicted to produce $118 billion in revenue this year alone. As a result, while there are reasons to expect that the product will be successful in the coming years, it will take time for it to have a significant impact on Meta stock and the company’s financials.
Meanwhile, as Meta successfully scales Reels, there is a possibility that the world will experience a prolonged global recession, causing Meta stock to fall further. Recent events, such as an OPEC oil production cut and a more hawkish Fed monetary policy, indicate that the macroeconomic situation may worsen further, limiting Meta’s capacity to raise sales in the short to medium term. This is something that investors should be aware of if they decide to invest in Meta stock.
Why I’m Bullish on Meta Stock
Reels are a game changer for Meta, as it is now one of the company’s most successful recent products, with the potential to continue generating returns and attracting advertisers, which the firm’s metaverse goods cannot achieve now. Given the likelihood that advertising revenues will continue to flood the video segment in the long run, Meta should continue to expand Reels by adding new features and offering transparent revenue-sharing agreements to attract new content creators, allowing the product to scale. That’s one of the key reasons, coupled with the fact that the company is now undervalued, that I’m bullish on Meta stock and have a long position in the company.
Featured Image- Megapixl @ Colour59
