Meta drops in after hours as rising expenses and Reality Lab losses lead to some profit-taking
3min read Meta Platforms reported impressive Q3 2024 results, with EPS at $6.03, significantly above the estimate of $5.25, and revenue of $40.59 billion, slightly exceeding the $40.29 billion consensus. This 19% year-over-year revenue growth highlights the company’s robust financial performance, with advertising revenue coming in at $39.89 billion, up 18.5% and surpassing the $39.44 billion expectation. CEO Mark Zuckerberg attributed the strong results to ongoing AI advancements across Meta’s app ecosystem, alongside continued adoption of AI tools like Meta AI and Llama.
The company’s Family of Apps (FoA) segment, which includes Facebook, Instagram, Messenger, and WhatsApp, drove much of the revenue, posting $40.32 billion, a 19% increase. Operating income for the FoA segment reached $21.78 billion, up 25% year-over-year, outperforming estimates of $20.47 billion. The Reality Labs segment, focused on augmented and virtual reality, generated $270 million in revenue, a 29% increase, though below expectations of $312.8 million. Despite the revenue increase, Reality Labs posted an operating loss of $4.43 billion, highlighting Meta's costly investments in the metaverse.
Looking forward, Meta provided Q4 revenue guidance between $45 billion and $48 billion, with a midpoint of $46.5 billion, slightly above the consensus of $46.31 billion. This guidance assumes foreign currency stability, and CFO Susan Li noted that Meta continues to anticipate "significant capital expenditures growth" in 2025. For the full year of 2024, Meta expects total expenses to range from $96 to $98 billion, with capital expenditures of $38 to $40 billion, a modest upward adjustment from prior guidance.
On the expenses side, Meta’s Q3 costs totaled $23.24 billion, a 14% year-over-year increase. Gross margins, however, remained resilient, with the company’s operating margin improving to 43%, up from 40% a year prior. Operating expenses have been influenced by increased spending on AI infrastructure and Reality Labs, as well as continued product development investments. Meta's expense management has supported an increase in free cash flow to $15.52 billion, underscoring robust operational efficiency amid rising costs.
In advertising, Meta achieved a 7% year-over-year increase in ad impressions across its platforms, with an 11% increase in the average price per ad, a marked improvement from the 6.76% expectation. These metrics reflect Meta's enhanced ad-targeting capabilities, boosted by AI-driven tools like generative AI ad creation, which reportedly improves conversions by about 7%. This growth is particularly encouraging given the competitive digital advertising landscape, in which peers like Google are also seeing strong performance.
Meta’s daily active users (DAU) on its Family of Apps grew to 3.29 billion, up 5% from a year ago, slightly ahead of expectations. The increase in engagement, attributed partly to AI-driven feed and video recommendations, led to an 8% increase in time spent on Facebook and a 6% increase on Instagram. Additionally, Meta's new microblogging platform, Threads, now boasts 275 million monthly active users, more than double its user base from earlier this year.
AI remains central to Meta's strategy. The company reported that over one million advertisers have used its generative AI tools, producing more than 15 million ads in a single month. Meta AI, its generative AI assistant, has over 500 million monthly active users and continues to see robust demand, especially on WhatsApp, which Zuckerberg highlighted as a high-growth platform in the U.S. and globally. These AI advancements are not only increasing user engagement but are also generating new monetization pathways.
Reality Labs, despite posting higher revenue, remains a significant area of expenditure for Meta. The segment’s $4.43 billion operating loss highlights Meta's aggressive investment in augmented reality (AR) and virtual reality (VR) hardware, including the Quest headset and Ray-Ban Meta smart glasses. These devices are part of Meta's long-term vision for the metaverse, but sustained losses indicate the financial burden this venture places on Meta's overall balance sheet.
Meta’s capital expenditure continues to rise, totaling $9.20 billion in Q3, as it expands its data center and AI infrastructure. CFO Susan Li commented on an "acceleration in infrastructure expense growth" expected in 2025, suggesting that Meta’s spending in AI infrastructure will remain elevated to meet growing demand. This capital allocation underscores Meta’s commitment to positioning itself at the forefront of AI and AR technologies.
Meta's cash position remains solid, with cash and equivalents of $70.9 billion and long-term debt of $28.82 billion as of September 30, 2024. The company’s shareholder return program included $8.86 billion in share repurchases, demonstrating management’s confidence in the long-term outlook. The increased dividend payments also suggest a stable free cash flow position, allowing Meta to reward shareholders amid high infrastructure costs.
Despite the positive Q3 results, shares dipped slightly in after-hours trading as some investors expressed caution over rising capital expenditures and Reality Labs losses. Given Meta's nearly 70% stock price rally year-to-date, the market may be looking for greater signs of cost discipline, particularly in its metaverse initiatives, which remain a divisive element of Meta’s strategy. Analyst sentiment remains optimistic, with CFRA reiterating a buy rating, citing the impressive operating margin and resilient ad revenue.
In summary, Meta’s Q3 results showcase a robust core advertising business supported by rapid AI adoption and increased ad efficiency. While Reality Labs continues to be a drag on overall profitability, the company’s steady ad revenue, engagement growth, and promising AI-driven features suggest a strong foundation for future growth. As Meta heads into Q4, investor focus will likely remain on balancing AI investment with financial prudence to sustain momentum in an evolving digital landscape.
