Social media empire Meta Platforms (META -1.16%) is valued at nearly $1.2 trillion, as of this writing. And according to a report from investment research firm Needham, about 17% of this value -- or $203 billion -- should be attributed to a part of the business that might surprise you.
Of course, with platforms as big as Facebook, Instagram, and Whatsapp, Meta Platforms' investors can be forgiven for overlooking something somewhere. But it's surprising that Needham believes there's so much value in a part of the business that gets such little attention.
To be clear, Meta Platforms' platforms are truly massive. The company doesn't break down its users per platform anymore. But across its social platforms -- what management calls its "Family of Apps" -- it has 3.24 billion daily active people as of the first quarter of 2024. That's roughly 40% of the planet's population.
Many parts of Meta Platforms are big and important -- this much is true. But this other value driver shouldn't be overlooked.
What else could possibly be worth $200 billion?
Needham's report takes a look at short-form video platforms, such as TikTok. And increasingly popular in the short-form video space is Reels from Meta Platforms. Reels provides short-form video options on both Facebook and Instagram and was management's answer to TikTok a few years ago. And it's worth over $200 billion now, according to the aforementioned research firm.
How could such a thing be so valuable? For context, investors need to remember that almost all of Meta Platforms' revenue comes from advertising. When it comes to growing this revenue source, there are things the company can do to improve the effectiveness, placement, and frequency of ads. But all of this is predicated on user engagement -- if people aren't on the platform in the first place, it's not generating ad revenue.
As it turns out, Reels is driving engagement for Meta Platforms. On the Q1 earnings call, management said that when its users get on the Facebook and Instagram platforms, they're watching video more than 60% of the time. There are multiple ways to watch videos on these platforms -- it's not just Reels. But management is clear that Reels is driving the growth in video consumption.
The big question for investors is whether Reels can keep driving engagement growth. And there is reason to believe that it can. In April, Meta Platforms updated its video engine so that everything it has is interconnected, providing the ability for more relevant video recommendations, in theory.
Meta Platforms is also working to upgrade its capabilities in artificial intelligence (AI), which management hopes will also improve the recommendation engine. And if users get better video recommendations, perhaps they'll binge-watch content just a little bit longer, giving the company a chance at higher engagement and ad revenue.
It's truly staggering to think that Meta Platforms is approaching trailing-12-month revenue of $150 billion and still growing at more than a 20% annual rate. But that's exactly what's happening, as the chart below shows.
META Revenue (Quarterly YoY Growth) data by YCharts
Considering over half of its user engagement is from video, investors should definitely monitor trends with Reels from Meta Platforms. It does seem that people are generally moving toward the consumption of these shorter-form videos, so the demand is there. And if the company can continue to improve its system to provide better recommendations, it could keep driving engagement and consequently continue achieving an above-average growth rate, which would be good for investors.
