Meta shares up 5% as it outpaces expectations; raises expense outlook

Meta Platforms (META) delivered robust Q2 earnings, reporting EPS of $5.16, surpassing the consensus of $4.72. Revenue also exceeded expectations, rising 22.1% year-over-year to $39.07 billion against the $38.26 billion estimate. The strong performance was driven by significant growth in ad impressions and an increase in the average price per ad, which both rose by 10% year-over-year.

Meta provided in-line guidance for Q3, projecting revenues between $38.5 billion and $41.0 billion, aligning closely with the consensus of $39.1 billion. Additionally, the company raised the lower end of its FY24 capex guidance to $37-$40 billion from $35-$40 billion. This adjustment reflects Meta's ongoing investments in AI research and product development. The company also indicated it expected significant capital expenditure growth in 2025.

Shares of META rallied 5% in after hours, briefly recapturing the $500 level. The stock is battling that area of resistance as we head into the conference call. The 50-day moving average ($492) looms as a key level for traders to watch.

Capital expenditures for Q2, including principal payments on finance leases, were substantial at $8.47 billion. Meta's commitment to expanding its infrastructure to support AI initiatives is evident, but it has raised concerns among investors regarding the immediate return on these investments. Despite these concerns, Meta's strategic focus on AI is anticipated to drive long-term growth and enhance its competitive edge in the technology sector.

In terms of user engagement, Meta reported that family daily active people (DAP) averaged 3.27 billion in June 2024, reflecting a 7% year-over-year increase. The company's Family of Apps revenue, encompassing Facebook, Instagram, WhatsApp, and Messenger, reached $38.72 billion, exceeding the $37.76 billion estimate. This segment's operating income also saw a notable increase of 47% year-over-year, totaling $19.34 billion.

However, the Reality Labs segment, which focuses on mixed reality hardware and software, continued to post significant losses. Revenue for this segment was $353 million, falling short of the $376.9 million estimate. The operating loss for Reality Labs was $4.49 billion, slightly better than the anticipated $4.53 billion loss, but still a significant financial drain on the company.

Meta's emphasis on AI spending remains a critical focus for Wall Street. The company's strategic investments in AI, highlighted by the recent launch of the open-source large language model Llama 3.1, are expected to yield substantial long-term benefits. CEO Mark Zuckerberg's advocacy for open-source AI models positions Meta as a leader in the AI space, although the timeline for realizing financial returns from these investments remains uncertain.

Overall, Meta's Q2 performance underscores its strong revenue growth and user engagement metrics, tempered by the substantial investments in AI and the ongoing financial challenges of the Reality Labs segment. As the company continues to navigate these complexities, investors will closely monitor the balance between immediate financial performance and long-term strategic investments in technology and AI.