Meta delivers strong earnings, but weak guidance and heavy AI spending prompt investors to bail – Business
Shares of Meta Platforms Inc. traded down more than 16% after-hours today following strong first-quarter earnings results that were overshadowed by light guidance.
The company reported earnings before certain costs such as stock compensation of $4.71 per share, beating Wall Street’s forecast of $4.32 per share by a comfortable margin. Revenue rose 27% from a year earlier, to $36.46 billion, ahead of the analysts’ call for $36.16 billion in sales. That represents the fastest rate of revenue growth since early 2021.
The accelerating revenue growth provided a big boost to Meta’s bottom line. All told, the company reported net income of $12.37 billion, up more than 50% from the $5.71 billion in net income it reported one year ago. The company’s profitability was also aided by a 16% drop in marketing costs from the year-ago period.
However, those good numbers were undone by a disappointing forecast for the second quarter, with the company saying it sees sales of between $36.5 billion and $39 billion. The midpoint of that range is $37.75 billion, below Wall Street’s forecast of $38.3 billion in revenue.
Meta Chief Executive Mark Zuckerberg appeared to make things even worse during a conference call with analysts, saying that the company is planning to increase its investments in areas where it doesn’t currently make much money, such as in virtual reality glasses and mixed reality, as well as artificial intelligence.
“On the upside, once our new AI services reach scale, we have a strong track record of monetizing them effectively,” he said in an effort to reassure analysts and investors.
Investors’ expectations have risen thanks to Meta’s improved financial performance over the last few quarters. Prior to today’s after-hours decline, the company’s stock had gained 40% in the year to date, having almost tripled in value in 2023. That came after Zuckerberg announced what he said would be a “year of efficiency” in February 2023.
Back then, Zuckerberg told analysts the company would focus on reducing money spent on unnecessary projects and streamlining its workforce in order to become “stronger and more nimble.” He made good on that promise, with the company making about 21,000 job cuts in the first half of that year. This year, Zuckerberg promised that hiring will proceed at a much slower pace than what the company has done historically.
Meta’s report showed that the company’s overall headcount at the end of the quarter was down more than 10% from the same period one year earlier, standing at 69,329.
In fiscal 2024, the company anticipates capital expenditure of between $35 billion and $40 billion, up from a prior forecast of $30 billion to $37 billion. That’s because it will “accelerate our infrastructure investments to support our artificial intelligence roadmap,” Zuckerberg told analysts.
Meta no longer reports how many daily active users and monthly active users its individual platforms have, but instead provides a figure called “family daily active people” that encompasses all of its main applications – Facebook, Instagram and WhatsApp. That number rose 7% from a year earlier, to 3.24 billion at the end of March.
One reason for Meta’s increased revenue is its digital advertising business, which has been growing steadily over the last year, following a dismal performance in 2022. Ad revenues were hurt that year by a major privacy update introduced by Apple Inc. and a general pullback in ad spending on macroeconomic concerns.
Meta responded by stepping up its investments in AI-driven targeted ads, researching models that can accurately predict more relevant ads for its users. It has also invested in AI tools that can automate the ad-creation process. Those investments have paid off handsomely, as the company reported that its ad revenue jumped 27% from a year earlier, to $35.64 billion.
It’s believed that Meta’s ad business has also been aided by a stabilizing economy and a jump in spending from low-cost Chinese retailers such as Temu and Shein, which have ramped up their ad campaigns on Facebook and Instagram in an effort to reach new audiences. However, there are now concerns that these China-based advertisers may reduce their ad spending this year.
Constellation Research Inc. analyst Holger Mueller told SiliconANGLE that Meta’s AI investments are increasingly becoming a matter of life or death for the company.
“Meta needs to invest in AI to keep the eyes and clicks of consumers, so the ad revenues keep rolling in,” Mueller explained. “Advertising is increasingly becoming AI-powered, and Meta faces some formidable foes in the likes of Google and Microsoft when it comes to that advertising pie. The company will be doomed if it does not succeed in AI, which is why Zuckerberg and team are so strongly invested in this race.”
Meta also needs to keep growing its AI-powered ad profits to prop up its Reality Labs business unit, which is a long-term bet responsible for its metaverse efforts. It continues to be a massive drain on the company’s finances. During the quarter, the unit drove $440 million in revenue but lost $3.85 billion overall. Since the end of 2020, the unit has lost more than $45 billion.