META Earnings Preview: Ad revenue and expenses in focus

Meta Platforms (META) is set to report Q3 earnings on Wednesday, October 30, after market close, with a conference call to follow. Analysts expect adjusted earnings per share (EPS) of approximately $4.40 and revenue around $40.4 billion, marking an estimated 18% year-over-year growth. Expenses are a critical focus for investors, as Meta has seen costs rise, especially around AI and infrastructure investments, and the company’s adjusted operating margin is anticipated to be around 39%, according to Evercore’s model sensitivity analysis.

The ad revenue component will be essential to Meta’s performance in Q3, particularly given Alphabet's strong Q3 ad results, which set a high bar. Evercore’s checks indicate a healthy ad market, with Meta’s ad demand and return on ad spend (ROAS) metrics showing strength, likely contributing to a solid result in ad revenues. Deutsche Bank anticipates Q3 revenue near the high end of Meta’s guidance, while Truist expects continued robust demand in social ads and higher CPMs, driven by Meta’s Advantage+ and AI-driven ad tools.

Expense management will be another closely watched area, as Meta’s capital expenditures have been high due to its AI and Reality Labs investments. Analysts expect guidance on 2025 operating expenses and capex early next year, but Bernstein suggests potential cost savings if Meta adjusts depreciation on servers, potentially reducing 2025 costs by $2.5 billion. Truist and Bernstein both believe Meta’s expenses and capex are justified long-term, enabling the company to maintain its competitive edge in the AI and social ad landscape.

For Q4, guidance is expected to show deceleration due to challenging comps, yet analysts predict strong year-end growth. Deutsche forecasts Q4 revenue growth in the high teens year-over-year, approaching $48 billion at the high end, while Truist expects a range between $44 and $46.5 billion. Meta’s position as a top ad platform is further supported by election-driven ad spending, with additional gains as advertisers shift away from TikTok amid possible regulatory issues.

Meta Platforms delivered a strong Q2 earnings report, surpassing analyst expectations with revenue of $39.07 billion (up 22% year-over-year) against estimates of $38.34 billion, and an adjusted EPS of $5.16, beating the consensus of $4.72. Core advertising revenue rose 22% to $38.33 billion, while Reality Labs, although still posting a loss, showed modest revenue growth of 28% to $353 million, slightly below expectations. Operating income came in higher than expected at $14.85 billion, while operating margins increased to 38%, indicating improved profitability across its Family of Apps.

Meta’s Q2 results highlighted its continued success in utilizing AI to enhance advertising efficiency and user engagement. Ad impressions grew by 10% year-over-year, with the average price per ad also rising 10%, reflecting strong demand across its platforms. Analysts noted that Meta’s AI-driven recommendation tools are helping drive engagement, particularly through new offerings like Meta AI and AI-based ad targeting, and there’s optimism around further monetization potential in WhatsApp and Threads. However, Reality Labs continued to weigh on profitability, with a substantial operating loss of $4.49 billion, underscoring ongoing challenges in the metaverse segment.

For guidance, Meta provided a Q3 revenue outlook of $38.5 to $41.0 billion, slightly above consensus, reflecting strong global advertising demand. The company maintained its total expense guidance for 2024, with only a slight upward revision to the lower end of its capital expenditure forecast, suggesting disciplined spending on AI and Reality Labs. Analysts are focused on Meta's ability to sustain this momentum in ad revenue growth and AI-driven improvements as it navigates rising costs. Following these results, analysts raised their price targets, with some expressing confidence in Meta’s long-term potential due to its leading ad solutions, user engagement, and the effective integration of AI into its business strategy.

Meta's stock performance has been strong, driven by positive investor sentiment and the company’s commitment to innovation across AI, social ads, and Reality Labs. The stock has seen substantial price target increases from several firms, with Pivotal initiating coverage with a $780 target and others raising targets between $600 and $675. Despite recent price gains, analysts remain bullish on Meta’s medium- and long-term prospects, supported by its unique growth flywheel in ad sales and broad user engagement.

In terms of product strategy, Meta is expanding its ad offerings, integrating client CRMs to enhance ROAS and improving AI ad tools, which should boost Q4 ad spend. Its focus on diversifying revenue sources, from WhatsApp monetization to developing products like Threads and AR/VR offerings, positions the company to capitalize on both short-term and emerging growth drivers. Evercore notes Meta’s momentum in capturing ad share, supported by its 3.3 billion daily active users across platforms.

Overall, investors will look to Meta’s Q3 earnings for clarity on ad revenue trends, expense management, and forward guidance, with the stock poised to react to any surprises in these key areas. Given Meta’s robust engagement metrics and market-leading ad solutions, analysts believe the company is well-positioned to deliver another quarter of solid growth, with potential upside in both earnings and revenue.