I don’t do memes frequently, but I’ve used this one twice:

Alas, I think I need to retire it. From the Wall Street Journal:

Meta Platforms posted 22% revenue growth in the second quarter, showing its core ad business remains strong at a time when the company is investing billions of dollars into artificial intelligence. For the first time this year, the company held its top capital-spending projections steady, a move that is sure to ease investor concerns over Chief Executive Mark Zuckerberg’s AI spending spree. Shares rose by more than 11% in after-hours trading.

The results show the extent to which Meta’s advertising business will continue to pay for its outsize AI ambitions, as well as how the AI tools are contributing to its strength. Sales came in at $47.5 billion, ahead of analyst expectations. Net income for the April-to-June period was $18.3 billion, also ahead of market expectations. Meta also said it expects to post between 17% and 24% revenue growth year-over-year for the current quarter. “The investments it’s making in AI are already paying off in its ads business,” said Jasmine Enberg, principal analyst at research firm eMarketer.

I’m obviously a bit tardy getting to these earnings, which is something that wouldn’t have happened if Meta had had very bad results the same quarter in which they started very publicly spending hundreds of millions of dollars on talent to overhaul their AI strategy. This stands in marked contrast to the 2021-2022 period, when Meta renamed itself from Facebook in conjunction with unveiling just how much money it was spending/losing on the Metaverse, even as its core business slowed significantly, driving the stock to below $100 and compelling me to write Meta Myths.

Lessons Learned

This wasn’t an accident, but rather evidence of a lesson learned; CFO Susan Li explained what that lesson was on an episode of John Collison’s Cheeky Pint podcast:

Susan Li: It’s pretty standard after earnings calls, where you touch base with some number of your largest investors. Sadly, it is not one-on-one, it’s one of you and many, many people from their teams. And most of the time, they just ask you to clarify things. Obviously, everything is Reg FD compliant, but it mostly takes the form of questions. And in October 2022, for the first time, there were sometimes no questions. I mean, there was a call where basically one of the portfolio managers said, “We actually don’t have any questions for you today. We just want you to hear feedback from us.”

John Collison: Wow. More of a comment than a question.

SL: Yes. It was actually very memorable.

JC: And it was blunt feedback, I presume.

SL: Yes. And one of the things that really stuck with me from one of those conversations is someone said, “Look, I get that you’re building the future of computing and the next mobile platform and all that, and that is great, and I am glad someone wants to do it and I am rooting for you, but why should I invest in your stock today? Why don’t I just wait for your phone equivalent, your scaled consumer product to come out and invest in you then, and you tell me that that’s going to be years away?”

And the way that question was framed actually really stuck with me, and is the way that, frankly, now Mark and I think about this. Which is like, great, we’ve got a lot of these bets, and the bets are technologically exciting. People can get excited about them and the vision of the world. But as investors, they’re like, “Cool, why don’t I just wait for your bets to be ready to succeed before I come?” We need people to invest with us along the way. When we think about the financial outlook of the company, a large part of it is not just, okay, cool, you’re building the next massive platform out here in some decades, it’s, why would you hold our shares until then? What do we need to keep delivering in terms of consolidated results?

The very first words out of Zuckerberg’s mouth on the earnings call stated Meta’s new thinking explicitly:

We had another strong quarter with more than 3.4 billion people using at least one of our apps each day, and strong engagement across the board. Our business continues to perform very well, which enables us to invest heavily in our AI efforts.

There have been historical examples of public companies having permission from investors to invest far ahead of profits, most notably Amazon. Matthew Yglesias famously wrote on Slate in 2013:

Amazon kept up its streak of being awesome this afternoon by announcing a 45 percent year-on-year decline in profits measuring Q4 2012 against Q4 2011. Not because sales went down, mind you. They’re up. Revenue is up. The company’s razor-thin profit margins just got even thinner, and in total the company lost $39 million in 2012.

The company’s shares are down a bit today, but the company’s stock is taking a much less catastrophic plunge in already-meager profits than Apple, whose stock plunged simply because its Q4 profits increased at an unexpectedly slow rate. That’s because Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers. The shareholders put up the equity, and instead of owning a claim on a steady stream of fat profits, they get a claim on a mighty engine of consumer surplus. Amazon sells things to people at prices that seem impossible because it actually is impossible to make money that way. And the competitive pressure of needing to square off against Amazon cuts profit margins at other companies, thus benefiting people who don’t even buy anything from Amazon.

It’s a truly remarkable American success story. But if you own a competing firm, you should be terrified. Competition is always scary, but competition against a juggernaut that seems to have permission from its shareholders to not turn any profits is really frightening.

This was obviously incorrect: Amazon was “losing money” (while still having fabulous free cash flow, mind you) because they were investing heavily in the infrastructure that supported The Amazon Tax; for several years now the company’s biggest “problem” has arguably been that they are throwing off more money than they can manage to reinvest, even with their massive buildout of AWS and their logistics network. Critically, however, it is easy to draw a line from those two buildouts in particular to future cash flows, and investors were willing to give Jeff Bezos the benefit of the doubt.

One of the weird things about Meta, on the other hand, is how the company never seemed to get the benefit of the doubt, at least up until the last couple of years; I wrote in Meta Myths:

Myspace is, believe it or not, still around; however, it has been irrelevant for so long that I needed to look it up to remember if the name used camel case or not (it doesn’t). It does, though, still seem to loom large in the mind of Meta skeptics certain that the mid-2000’s social network’s fate was predictive for the company that supplanted it.

There is something about social media that has always made investors intrinsically suspicious of the long-term; given that, Meta’s simultaneous slowdown in growth (mostly driven by ATT), combined with the public shift in focus to the Metaverse, fueled concern that the company was desperately trying to pivot away from a failing business — and losing billions of dollars to do so, with very few tangible results.

Things are very different now, however, in two regards. First, there is the aforementioned commitment by management to deliver results now, not just promises about the future; second, investor sentiment about Meta really has done a 180: if anything, my impression is that Meta is not just getting the benefit of the doubt, but actually more credit than they deserve.

AI That Matters

This is a very good quarter to deliver the updated version of my favorite Meta chart:

Last quarter I wrote about Meta’s Deteriorating Ad Metrics:

The first thing to note is the leveling out of impression growth even as Daily Active Person’s growth increased slightly; what this means is that the Reels inventory growth tailwind may be over. That’s always a bearish signal, as I noted a year ago in Meta and Reasonable Doubt…

Secondly, and more concerningly, is that while price-per-ad growth outpaced impression growth, it also decreased quarter-over-quarter. One of the reasons why 2023 was such a good time to own Meta is that a combination of figuring out ATT and expanding Reels inventory meant that both impressions and price-per-ad increased simultaneously; in contrast, it is a lot less attractive when both are decreasing simultaneously…

The two previous quarters where the growth rates for impressions and price-per-ad simultaneously decreased were 4Q 2016 and 1Q 2019; the positive takeaway is that I’m not actually totally certain what happened in 4Q 2016, and I wasn’t concerned at the time. 1Q 2019 is more interesting, in that I chalked up the issue to increased time spent on Stories cannibalizing Feed at a time when Stories had fewer impressions and worse monetization; to that end, the positive spin on this point is that Meta still has a lot of room to increase Reels monetization.

This quarter looks much better: impressions increased growth significantly; when that happens you should expect price-per-ad to decline, but notably, the decline was relatively attenuated compared to last quarter. This is a great result that drove the blowout numbers that made investors willing to give Zuckerberg a big fat permission slip for his AI talent splurge.

What, though, were the drivers of these significantly improved ad fundamentals? Zuckerberg was quick to credit AI:

On advertising, the strong performance this quarter is largely thanks to AI unlocking greater efficiency and gains across our ads system. This quarter, we expanded our new AI-powered recommendation model for ads to new surfaces and improved its performance by using more signals and a longer context. It’s driven roughly 5% more ad conversions on Instagram and 3% on Facebook.

I think this credit is fair, particularly in terms of the relative lack of decline in price-per-ad (given the impressions growth). However, what is important to note is that the “AI” Zuckerberg is referring to is not LLMs; Li, to her credit, spent an extensive amount of time in her prepared remarks detailing the AI systems — Andromeda, GEM, and Lattice — that are actually driving these improvements. These are all impressive, to be sure, but the reason I suggested that investor sentiment may have swung too much away from suspicion to gullibility was the way in which I saw a lot of folks conflate Meta’s new SuperIntelligence investments with their great results, as if the former caused the latter; in fact, Zuckerberg clearly stated that they were totally different initiatives:

I think the trajectory on this stuff is very optimistic. And I think it’s one of the interesting challenges in running a business like this now is there’s just a very high chance, it seems, like the world is going to look pretty different in a few years from now. And on the one hand, there are all these things that we can do, there are improvements to our core products that exist.

It’s the “improvements to our core products that exist” that drove these results; Zuckerberg now knows — but seemingly still chafes, just a tad — that there is an opportunity cost that must be paid in terms of driving those improvements to get permission to invest in superintelligence. To put it another way, (1) Zuckerberg really wants to focus on the latter, and (2) now knows that the way to get investor permission to do so is to deliver short-term results. That, by extension, makes me think the AI story isn’t the whole story when it comes to Meta’s ads.

Reels and Dials

To go back to the chart above, previous drivers of increased impressions growth were meaningful product additions that vastly increased ad inventory; from Meta and Reasonable Doubt:

There are two-and-a-half inversions of impression and price-per-ad growth rates on this chart:

• In 2017 Meta saturated the Instagram feed with ads; this led impressions growth to drop and the price-per-ad to increase; then, in 2018, Instagram started to monetize Stories, leading to increased growth in impressions and corresponding decreases in price-per-ad growth.
• In 2020 Meta saturated Instagram Stories; this once again led impressions growth to drop and the price-per-ad to increase; then, while COVID provided a boost in 2021, 2022 saw a significant increase in Reels monetization, leading to increased growth in impressions and a decrease in price-per-ad growth (which, as noted above, was made more extreme by ATT).
• Since the middle of last year Meta Impressions growth is once again dropping as Reels becomes saturated; this is leading to an increase in price-per-ad growth (although the lines have not yet crossed).

The most optimistic time for Meta’s advertising business is, counter-intuitively, when the price-per-ad is dropping, because that means that impressions are increasing. This means that Meta is creating new long-term revenue opportunities, even as its ads become cost competitive with more of its competitors; it’s also notable that this is the point when previous investor freak-outs have happened.

The problem I saw in that Article is that Meta didn’t have any obvious product improvements on the horizon that would meaningfully increase inventory. Yes, Threads and WhatsApp ads are coming, but they’re still not big revenue drivers. And yet, we got impression growth all the same! Here was the closest thing we got to an explanation from Li in her prepared remarks:

Impression growth accelerated across all regions due primarily to engagement tailwinds on both Facebook and Instagram and, to a lesser extent, ad load optimizations on Facebook.

Li also said on the results follow-up call:

So on your first question about impression growth, the worldwide impression growth acceleration that we saw in Q2 was driven primarily by incremental engagement on video and Feed surfaces, which benefited from a bunch of the ranking optimizations that we made to our content recommendations on Facebook and Instagram, and then to a lesser extent some of the ad load optimizations.

It turns out I was right last quarter that Meta had a lot of room to increase Reels monetization, but not just because they could target ads better (that was a part of it, as I noted above): rather, it turns out that short-form video is so addictive that Meta can simply drive more engagement — and thus more ad inventory — by pushing more of it. That’s impression driver number one — and the most important one. The second one is even more explicit: Meta simply started showing more ads to people (i.e. “ad load optimization”).

All of this ties back to where I started, about how Meta learned that you have to give investors short term results to get permission for long term investments. I don’t think it’s a coincidence that, in the same quarter where Meta decided to very publicly up its investment in the speculative “Superintelligence”, users got pushed more Reels and Facebook users in particular got shown more ads. The positive spin on this is that Meta has dials to turn; by the same token, investors who have flipped from intrinsically doubting Meta to intrinsically trusting them should realize that it was the pre-2022 Meta, the one that regularly voiced the importance of not pushing too many ads in order to preserve the user experience, that actually deserved the benefit of the doubt for growth that was purely organic. This last quarter is, to my mind, a bit more pre-determined.

Social Network R.I.P.

The link in the previous paragraph is to then-Facebook’s Q3 2016 earnings call; that’s as good a place as any to find one of a bajillion quotes from Zuckerberg about connecting people:

Over the next 10 years, we’re going to continue to invest in the platforms and technologies that will connect more people and more places and allow everyone in the world to have a voice. We focused our long-term innovation roadmap around three areas: connectivity initiatives that bring more people online; artificial intelligence; and virtual and augmented reality.

The “artificial intelligence” and “virtual and augmented reality” investments are obviously still there in a major way; what is interesting to note, however, is that the word “connect” — at least in the context of what Zuckerberg repeatedly stated was Facebook’s mission — only appeared once on this earnings call:

Over the last few months we have begun to see glimpses of our AI systems improving themselves. The improvement is slow for now, but undeniable. Developing superintelligence — which we define as AI that surpasses human intelligence in every way — we think is now in sight.

Meta’s vision is to bring personal superintelligence to everyone — so that people can direct it towards what they value in their own lives. We believe this has the potential to begin an exciting new era of individual empowerment. A lot has been written about the economic and scientific advances that superintelligence can bring. I am extremely optimistic about this. But I think that if history is a guide, then an even more important role will be how superintelligence empowers people to be more creative, develop culture and communities, connect with each other, and lead more fulfilling lives.

To build this future, we’ve established Meta Superintelligence Labs, which includes our foundations, product, and FAIR teams, as well as a new lab that is focused on developing the next generation of our models. We’re making good progress towards Llama 4.1 and 4.2 — and in parallel, we’re also working on our next generation of models that will push the frontier in the next year or so.

Long gone are the days when Meta’s self-identification as a social network led them to miss fundamental shifts in the Internet; this commitment to delivering superintelligence, with the expressed goal of helping people “direct it towards what they value in their own lives” — note the explicit callout of individualism, not community — is the end of a shift that Meta was both late to and has also been undergoing for years.

And, I would note, it’s that shift that provided the dials I wrote about in the previous section. Pushing people ever more short-form video — with ever more advertisements — is intrinsically isolating and contrary to social interaction (making it easier to share Reels with your chat groups notwithstanding). Indeed, I think this connection is inevitable: I suspect that what companies most strenuously push as their mission is often the most favorable interpretation of their downsides. Apple talks about integration, while their critics argue they control too much; Google talks about capturing knowledge and making it useful, while their critics argue they violate privacy; Meta used to talk about connection, while their critics fretted about the negative effects of peer pressure and falling into the wrong communities, and many investors nervously awaited the next viral social network. Now Meta talks about empowering the individual, even as they justify their investment to investors by pushing users ever deeper into individually-tailored short form video feeds.

At a minimum, it gives the company a solid legal defense; the company recently wrote in a filing defending itself from the FTC’s charge that it monopolized social networking:

The evidence decisively demonstrated that Meta – once an online “Facebook” for connecting students – has evolved into a diverse global provider of entertaining and informative content that competes with increasingly similar social apps including TikTok, YouTube, iMessage, and others. Times, technologies, and norms of use change, and the trial evidence proved that Meta has adapted due to competitive pressure in this fast-moving industry. Today, only a fraction of time spent on Meta’s services – 7% on Instagram, 17% on Facebook – involves consuming content from online “friends” (“friend sharing”). A majority of time spent on both apps is watching videos, increasingly short-form videos that are “unconnected” – i.e., not from a friend or followed account – and recommended by AI-powered algorithms Meta developed as a direct competitive response to TikTok’s rise, which stalled Meta’s growth. The FTC now concedes this development “brings Meta into competition with TikTok and YouTube.” That concession means that there is no valid PSNS market, which is the sole market the FTC asserts.

This is obviously correct; indeed, maybe investors were actually right all along: being a social network wasn’t ultimately sustainable, and the fact that Meta is stronger than ever, with entirely new justifications for being, is the real reason why they deserve the benefit of the doubt.

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