Meta-worse? I don't think so.

I'm buying more shares of Meta tomorrow

It’s quite possible I’m the last Meta Bull left standing. However after reviewing the transcript of the conference call, I don’t understand the investor panic. If anything, Mark and the Meta team clearly laid out how they plan on solving Apple’s ATT and beating TikTok.

So on the business side, I think certainly, you see dynamics like what Apple has done with ATT and continues to do in some ways with the policy that they announced yesterday, which are obviously big risks and we see as issues. But there are also other things that -- like we just believe that -- and we've invested so much in measurement over time because since our ads help people higher up in the funnel than search ads, for example, we think that often, less of the value of sales is attributed to us than should be. So for all these reasons, having a funnel that's more integrated where we do more commerce internally, this is a big part of what we hope to achieve with business messaging. And the fact that you can find a customer, have a thread directly with them in a business chat and be able to sell a product directly or to be able to do customer support and then help people out with the product and then maybe sell them something else, that kind of integration, I think, is going to be valuable very broadly in terms of making sure that the value that we're creating for businesses and consumers can be more efficiently measured and attributed to our services.

We have continued our broader work to rebuild meaningful elements of our ad tech. So our system can improve performance and measurement with -- and we've been making investments in the short and the medium term and over the long term.

In the short and the medium term, what we've been very focused on is evolving our ad system by growing on-site conversions with products like lead ads and ads that click to message. And we're continuing to make investments in AI and machine learning to improve measurement targeting and delivery. We have been pleased with our progress that we've made this quarter to help advertisers improve performance, targeting and measurement. I would be remiss if I didn't talk about how AI and ML is really helping advertisers. One example of this is Advantage + Shopping. We launched it in August. It's a product that's enabled by machine learning that helps clients test, learn and optimize their campaigns faster. It's early, but a recent test across a cross-section of advertisers found that those using Advantage+ Shopping campaign saw a 32% increase in return on ad spend. Over the longer term, we're focused on investing in privacy-enhancing technologies, both our own portfolio of solutions, but also working with the industry to do that. And all of this is in the spirit of investing in this technology to help advertisers get more value.

As Zuck and Marne Levine (Chief Business Officer) spell it out, Meta is making significant investments designed to improve measurement targeting and delivery.

By investing in AI they can make better recommendations and help advertisers to run better campaigns. By investing in messaging they can track the contact point of an advertiser and the customer, thus allowing them to monetize the ad. This is one of the major pain points from Apple ATT.

On the engagement side, in terms of how incremental this is, the basic way to think about this is you have a set amount of inventory across the system. There's content from family and friends, which is quite differentiated and valuable and accounts that you follow. But now there's this whole larger corpus that we can use AI to effectively understand what the content means and understand individually what you might be interested in, just have access to a much bigger corpus of content to put into your feeds and increase engagement. And we're seeing that start to work already and be incremental in terms of having more people use the services, having them to spend more time, having them spend -- just engage more in feeds overall. So that part of things we think is going well.

In other words AI will allow them to move beyond things such as physical location and browsing history from cookies. They can learn from the Reels you watch, the accounts you follow, who your friends are, etc. Things that they control on their platform which Apple can’t touch.

Unfortunately the market is doing what markets do. Panic. The opex and capex numbers have investors in revolt and selling off shares.

One thing I'd point out first is just next year's guide includes an estimated $2 billion in 2023 expenses that are onetime charges as part of our office facilities consolidation as we continue to rationalize our real estate footprint. We also expect a little over half of our expense dollar growth in 2023 to come from OpEx, with the rest coming from cost of revenue. On the OpEx side, the growth in 2023 OpEx is primarily driven by headcount-related costs from employees that we've already hired through 2022, and those hires have primarily been concentrated in technical and more senior roles. So we expect the slowdown in payroll growth in 2023 will be the result of the slowdown in headcount growth overall. As we mentioned, we expect to end 2023 with headcount roughly flat to where we are now. And on the cost of revenue side, we expect the growth rate of cost of revenue to accelerate in '23 driven by the increased depreciation that we're seeing play through from the big CapEx investments that we've made so far and then as well as from Reality Labs with the launch of the next generation of the consumer Quest headset later next year.

Three keys drivers of the Opex raise.

1.) 2B is a one time charge. Total expenses as laid out in the call will increase from 86B at the mid point to 99B at the midpoint. Less the 2B brings you to an increase of 11B.

2.) Payroll isn’t expected to grow in 2023 as they will keep headcount flat

3.) Cost of Revenues will reflect depreciation now that new Quest is launching. In other words a non cash expense. Obviously we don’t know the exact amount but seemingly it’s substantial given the billions which have been invested in Capex for Reality Labs.

Numbers 1 and 3 shouldn’t come as a big surprise to anyone as these were known and should have been relatively priced in. Number 2 is a shock. But it begs the question of why.

I’ll reference this question from Mark Mahaney on the call

And I'm trying to figure out how much of a priority it is for the company and how long the company thinks it can take to kind of recover or to create a new, I don't know, probabilistic ad attribution model, probabilistically based ad targeting model. This is something that took $10 billion maybe out of your business. I mean it had a material financial impact. And listening to the call, I just don't hear it as a major investment priority.

As stated…there is a 10B hole in the business. Are we shocked that it doesn’t just fix itself?!? And I disagree with Mr. Mahaney, it’s very clear that this is a major investment priority. It’s just that the market bias against the Metaverse (which long term I believe is a zero) has blinded it to what Zuck and the team are saying: The biggest investments are AI and messaging followed by the metaverse.

Before turning to our CapEx outlook, I'd like to provide some context on our infrastructure investment approach. We are currently going through an investment cycle, which is being driven -- which is primarily driven by 2 large areas of investment. First, we are significantly expanding our AI capacity. These investments are driving substantially all of our capital expenditure growth in 2023. There is some increased capital intensity that comes with moving more of our infrastructure to AI. It requires more expensive servers and networking equipment, and we are building new data centers specifically equipped to support next-generation AI hardware. We expect these investments to provide us a technology advantage and unlock meaningful improvements across many of our key initiatives, including Feed, Reels and Ads. We are carefully evaluating the return we achieved from these investments, which will inform the scale of our AI investment beyond 2023. Second, we are making ongoing investments in our data center footprint. In recent years, we have stepped up our investment in bringing more data center capacity online. And that work is ongoing in 2023. We believe the additional data center capacity will provide us greater flexibility with the types of servers we purchase and allow us to use them for longer, which we expect to generate greater cost efficiencies over time. These investments, along with revenue headwinds, are contributing to higher capital expenditures as a percentage of revenue in 2022 and 2023 than we expect over the long term. Turning now to the specific CapEx outlook for '22 and '23. We expect 2022 capital expenditures, including principal payments on finance leases, to be in the range of $32 billion to $33 billion updated from our prior range of $30 billion to $34 billion. For 2023, we expect capital expenditures to be in the range of $34 billion to $39 billion driven by our investments in data centers, servers and network infrastructure. An increase in AI capacity is driving substantially all of our capital expenditure growth in 2023.

Again the driver of expenses is not Reality Labs. It’s the AI engine they need to battle TikTok and Apple’s ATT.

Final thoughts from me: Is it possible that they are focused too much on the metaverse? Yes. Does that mean they aren’t doing enough to solve their issues? No. I think their strategy is sound and the results from WhatsApp (WhatsApp messaging revenues up 80%, North America WhatsApp fastest growing market last quarter) speak to that.

This is a platform that touches 1/2 of the world’s population. Perhaps only Google touches more people on a daily basis. It was powerful enough to create the largest upset in election history. And it’s trading at a multiple which is cheaper than the market, and still substantially discounted to it’s historical range. The macroeconomic environment will change in a few years. If Meta’s investments in AI and messaging solve it’s Apple ATT problem, $250/share seems a minimum. To me betting against Zuck and the Meta team to be able to write good code seems a bad bet over a long time horizon.