Meta shows its AI spending is already paying off in big earnings beat
Meta Platforms on Wednesday reported better than expected quarterly results, delivering revenue at the high end of guidance thanks to a roughly 22% increase in advertising dollars. While there are still concerns about the company’s aggressive AI spending, we believe these investments will pay off in the long run. Revenue in the three months ended June 30 rose 22% year over year to $39.07 billion, beating the $38.3 billion expected by analysts, according to estimates compiled by LSEG. Earnings per share in the second quarter increased 73% year over year to $5.16, exceeding the Street’s $4.71 EPS estimate. Meta Platforms Why we own it : We value Meta Platforms for its targeted advertising dominance. Deep user engagement also creates a flywheel effect between users and content producers/marketplace sellers. The company’s scale provides the financial power and employee talent needed to ensure new growth avenues such as artificial intelligence, the metaverse and virtual and augmented reality projects. We like management’s intense focus on cost controls. Competitors : Alphabet , TikTok (owned by China’s ByteDance) and Snap Weight in portfolio : 4.78% Most recent buy : Sept. 6, 2022 Initiated : May 29, 2014 Bottom line Shares of Meta Platforms rallied as much as 7% in after-hours trading in reaction to the better-than-expected quarter. Although the market still has some concerns about the pace of AI Investment after enjoying the Meta’s year of efficiency in 2023 — this was the main fear last quarter — Zuckerberg did a better job this time explaining on the post-earnings call with investors the different ways in which AI is benefitting the company. One of the more obvious ways is improving its recommendation systems to increase user engagement on the platform. AI is also leading to increased monetization efficiency. This is important: Some may criticize Meta’s investment spree, but the company is clearly getting a strong return on some of its core AI investments. Both trends were cited as the main drivers behind Meta’s revenue outperformance in the quarter. “Across Facebook and Instagram, advances in AI continue to improve the quality of recommendations and drive engagement. And we keep finding that as we develop more general recommendation models, content recommendations get better,” Zuckerberg said on the call. Zuckerberg added that AI is opening the door to new experiences and opportunities, especially with Meta AI, which is powered by the company’s large language model that is often referred to as Llama. Zuckerberg said he believes Meta AI will be the most used AI assistant in the world by year end. And finally, it is advancing the metaverse faster than what Zuckerberg initially predicted. “A few years ago, I would have predicted that holographic AR would be possible before smart AI, but now it looks like those technologies will actually be ready in the opposite order,” he added. We downgraded Meta to a 2 rating when we sold some shares at around $530 per share in early July. While we are reiterating that rating this evening, we feel better about the potential of upgrading it back to a 1 on some weakness, knowing the core business continues to put up robust results. We reiterate our $560 price target. Quarterly commentary Meta’s family of apps, which includes Facebook, Instagram, Messenger, WhatsApp, and other services, delivered better-than-expected results with revenues up 22% and operating income up 47%. The company’s user metrics look solid: Family daily active people (DAP) increased to 3.27 billion from 3.24 billion in the first quarter, and the average revenue per person (ARPP) increased to $11.89 from $11.20 a quarter ago. Zuckerberg cited the United States as a bright spot, especially with young adults, with year-over-year monthly active user growth across Facebook, Instagram, and threads. Increasing users and engagement in the U.S. is key, since it’s Meta’s most profitable region. In terms of advertising data, both ad impressions across the apps business and the average price per ad increased 10% year over year. Ad impressions measure how many times an advertisement is shown on an app. Realty Labs, the unit formerly Oculus VR that makes virtual reality and augmented reality hardware and software, delivered mixed results with sales slightly lighter than expectations. But we’ll gladly take lower sales over the somewhat better operating loss, which was $4.48 billion in the quarter. The company said demand for both Ray-Ban Meta glasses and Quest 3 are exceeding expectations. Regarding shareholder returns, the company repurchased $6.32 billion worth of stock, down from $14.6 billion in the first quarter, and paid $1.27 billion in dividends. Guidance Meta expects third-quarter 2024 revenue to be in the range of $38.5 billion to $41 billion, a beat at the midpoint of $39.75 billion compared to consensus expectations of $39.1 billion, according to FactSet. But the company also expects full-year capital expenditures to potentially be higher than originally planned. Management now sees capex in the range of $37 billion to $40 billion, up from its prior range of $35 billion to $40 billion. This new midpoint of $38.5 billion is above the consensus estimate of $37.2 billion. Still, the company left its full-year expense outlook unchanged at $96 billion to $99 billion. Meta would rather err on the side of overspending on AI capacity and compute than underspend, a sentiment Alphabet shared when it reported earnings last week. “I’d rather risk building capacity before it is needed rather than too late, given the long lead times for spinning up new infra projects,” Zuckerberg said. (Jim Cramer’s Charitable Trust is long META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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This photo taken on February 27, 2024 shows Mark Zuckerberg, head of US tech giant Meta, speaking to reporters at the Japanese prime minister’s office during his visit to Tokyo.
STR | JIJI Press | AFP | Getty Images
Meta Platforms on Wednesday reported better than expected quarterly results, delivering revenue at the high end of guidance thanks to a roughly 22% increase in advertising dollars. While there are still concerns about the company’s aggressive AI spending, we believe these investments will pay off in the long run.
