META Earnings Preview: An eye on expenses and returns
Meta Platforms, Inc. (META) is set to report its Q2 earnings after the market close on July 31, with consensus expectations for revenue at approximately $38.28 billion, reflecting a 19.65% year-over-year increase, and EPS of $4.78, representing a 60.27% growth. Despite the strong expected results, investor concerns center around the company's substantial increase in capital expenditures to $35-40 billion aimed at enhancing AI infrastructure and developing advanced models like Llama 3.1. Meta's aggressive CapEx plans have raised questions about immediate returns, although some analysts believe that the company's open-source AI strategy will ultimately drive long-term growth.
Meta's investments in AI have shown promising results, improving app engagement and ad performance. The company’s AI-driven Reels growth has been significant, and its open-source AI models are gaining traction with key partners such as Amazon and Nvidia. However, the substantial increase in spending has made investors uneasy, as the benefits of these investments may take years to materialize. Despite these concerns, Meta's AI advancements are expected to provide a competitive edge in the digital advertising market, contributing to improved engagement and monetization.
Analysts have mixed opinions on Meta's financial outlook. While some remain optimistic about a potential revenue beat and continued growth in ad engagement and monetization, others are wary of the elevated CapEx and its impact on margins. Mizuho, for instance, believes that Meta's flexibility in managing operating expenses will mitigate the margin dilution risk, while Wolfe maintains a positive long-term view, citing Meta's scale, AI investments, and category leadership as key growth drivers.
Meta's Q2 guidance indicates continued strong performance, with expected revenues of $39 billion for Q3 and a projected full-year organic revenue growth of 1-2%, down from the previous 4% estimate due to headwinds in the China market. The company's aggressive spending on AI is seen as a strategic move to ensure leadership in the technology space, despite the short-term financial strain. CEO Mark Zuckerberg has emphasized the long-term benefits of these investments, which are already enhancing ad impression growth and average price per ad.
The broader online advertising market remains healthy, supported by recent strong performance from competitors like Google. Meta's ability to leverage AI for better ad targeting and conversion rates has been a key factor in its recent success. However, the market's reaction to increased spending underscores the delicate balance Meta must maintain between investing for future growth and delivering near-term financial performance.
Overall, Meta's Q2 earnings report is expected to reflect the company's strategic shift from cost efficiency to aggressive investment in AI. While this approach has raised concerns among investors, the potential long-term benefits of Meta's AI initiatives could drive significant value. The company's focus on improving ad engagement and monetization, coupled with its leadership in AI, positions Meta for continued growth, although the immediate financial impact of its investments will be closely scrutinized by the market.
Meta Platforms reported record Q1 2024 revenue of $36.5 billion, a 27% year-over-year increase, but shares fell by over 15% following the announcement of increased spending on AI infrastructure. The company’s aggressive CapEx plans, projected to reach $35-40 billion, aim to enhance AI capabilities and support the development of advanced models like Llama 3.1. Investors became uneasy, fearing that these high costs might not yield immediate returns, reflecting skepticism about the long-term payoffs of these investments. However, the investment strategy aims to leverage the market for free innovation, cutting effective R&D costs for tools that will benefit Meta internally and potentially grow its social media dominance.
CEO Mark Zuckerberg is moving past the "year of efficiency," shifting back into aggressive spending that previously affected stock performance in 2H21 and 2022. The substantial increase in FY24 capex guidance to $35-$40 billion from $30-$37 billion overshadowed the strong Q1 performance, where EPS and revenue jumped by 114% and 27%, respectively.
The market had anticipated strong results, as evidenced by the stock's 38% year-to-date rally prior to the earnings announcement. Despite the robust earnings growth driven by cost management, a strengthening advertising market, and AI-driven improvements, the magnitude of the increased spending surprised investors. META also raised its FY24 total expense outlook to $96-$99 billion, further adding to investor concerns.
Adding to investor anxiety, META stated that capex is expected to continue increasing next year to support its ambitious AI research and product development plans. During the earnings call, Zuckerberg warned that it could take years before these investments generate significant returns. Despite this, META's investments in AI have already positively impacted financials, driving stronger app engagement metrics, ad impression growth (+20% in Q1), and higher average price per ad (+6%). In contrast, investments in the metaverse and related products like VR headsets have been harder to justify, with Reality Labs posting a $3.8 billion loss in Q1.
Additionally, the midpoint of META's Q2 revenue guidance was slightly below expectations, creating concerns about potential softening in advertising spending. This cautious outlook also impacted shares of competitors like Snap, Pinterest, and Alphabet. The main takeaway is that META is transitioning from cost containment to aggressive investment to secure an AI leadership position, a strategy seen as more sound given the clear benefits AI is already providing, though margins and earnings growth from the "year of efficiency" may decline.