After the U.S. stock market on Wednesday, April 24, Meta, a "metaverse platform" and a social media and digital advertising giant that bets heavily on AI, announced its financial results for the first quarter of fiscal year 2024.
Meta's first-quarter revenue and earnings were higher than expected, and core advertising revenue growth accelerated, but it is expected to have second-quarter revenue of $36.5 billion to $39 billion, the midpoint of the range equal to an 18% year-on-year increase, weaker than the market expectation of $38.24 billion or a year-on-year increase of 20%, causing an after-hours plunge of 18%.
Some analysts said that Tesla's earnings report was worse than expected but the stock price soared by a double-digit percentage, and Meta's earnings report was better than expected but the stock price plummeted by double digits, "fundamental investment common sense is dead".
On Wednesday, Facebook's parent company, Meta, closed down 0.5 percent, but off a two-month low set on Friday. The stock is up 39% this year, doubling more than 130% in the past 12 months, significantly outperforming the S&P's broader market gain of 24% and bringing its market value back to $1 trillion, driven by efforts to drive user engagement, investment in AI technology, and higher advertising revenue.
Ahead of the earnings release, Wall Street was optimistic about higher user engagement and return on advertising from AI, improved advertising environment, and a leaner operating cost structure. Under the consensus expectation of "strong buy", a total of 40 people rated "buy", 2 rated "hold", and only 1 recommended "sell", and the average price target of $547.45 represents 10% upside.
Meta's revenue growth in the first quarter was the fastest in three years, and the metaverse still suffered a huge loss of nearly $3.9 billion, with AI-driven advertising growth
According to the financial report, Meta's revenue in the first quarter was $36.46 billion, higher than analysts' expectations of $36.12 billion, a year-on-year increase of 27%, which not only marked the fifth consecutive quarter of revenue growth, but also recorded the fastest expansion rate in three years since 2021.
Among earnings metrics, EPS came in at $4.71 per share, beating expectations of $4.32 and doubling or up 114% from $2.20 in the year-ago quarter. Operating profit increased 91% year-over-year to $13.82 billion, and operating margin increased to 38% from 25% in the year-ago quarter. Net profit increased 117% year-on-year to US$12.37 billion.
Its core advertising revenue was $35.64 billion, basically in line with expectations of $35.57 billion, equivalent to a year-on-year increase of 26.8%, faster than the previous quarter's increase of 24%, and the proportion of total revenue increased slightly to about 98%.
Previously, analysts said that due to strong demand for e-commerce and games, improved ad revenue and operational efficiency may drive Meta's first-quarter earnings higher, but the slowdown in the growth of Chinese advertisers, who account for about 10% of the company's total ad sales, is a potential risk.
The good news is that the highlight of this earnings report is that the AI-driven advertising business is driving total revenue growth.
Reality Labs, which is responsible for developing virtual reality hardware and software technologies such as the metaverse, has suffered huge losses of nearly $4 billion for several consecutive quarters.
Sales in the first quarter were $440 million, weaker than expectations of $513 million, up about 30 percent year-over-year, and an operating loss of $3.85 billion, but better than the consensus estimate of a loss of $4.31 billion. Previously, the division's operating loss had accumulated to $42 billion since the end of 2020.
Key user and monetization metrics are improving quarter-over-quarter, with analysts reporting a significant increase in the average price per ad offer
In key user data and metrics that measure the ability to monetize its user base, Meta's daily active users (DAP) across app families averaged 3.24 billion in March, up 7% year-over-year, ad impressions across app families grew 20% year-over-year, and average price per ad grew 6% year-over-year, representing a sequential improvement in these metrics quarter-over-quarter.
Meta's official guidance had expected total revenue in the first quarter of 2024 to be in the range of $34.5 billion to $37 billion. Revenue in the fourth quarter of last year rose 25% year-over-year to $40.1 billion, mainly due to a 24% increase in advertising revenue and a three-fold increase in adjusted earnings per share to $5.33, both above market expectations. Key indicators all improved, with the overall number of monthly active users at 3.98 billion, up 6.4% year-over-year.
Meta said that starting with the first quarter of 2024, it will no longer report key metrics such as DAU (daily active users), MAU (monthly active users), ARPU (average revenue per user) and MAP (monthly active people in the app family), and will instead focus on ad impressions (ad). impression) and average price per ad by geographic segment, while continuing to report DAP (daily active people per app family) and DAP-based ARPP (average revenue per person).
The company explained that this is due to the fact that "user"-based activity metrics such as DAU, MAU and ARPU only come from two apps, Facebook and Messenger, while DAP and "people"-based ARPP can cover the "whole family" of apps such as Facebook, Instagram, Messenger and WhatsApp.
The lower end of the range for total spending this year was raised by $2 billion, and capital expenditure expectations were significantly increased due to investments in AI
Meanwhile, Meta's total costs and expenses in the first quarter were $22.64 billion, up 6% year-on-year. Capital expenditures were $6.72 billion. Cash, equivalents and marketable securities were $58.12 billion and free cash flow was $12.53 billion at the end of the quarter.
During the quarter, the company repurchased $14.64 billion of Class A common stock and paid a dividend of $1.27 billion. The total number of employees as of March 31 this year was 69,329, a decrease of 10% year-on-year, but an increase of 3% or 2,000 from 67,317 at the end of last year.
The first quarter was a good start to the year, according to its earnings statement. The app family is showing strong momentum and making important progress in a long-term strategy for artificial intelligence and the metaverse, the latter of which has the potential to change the way people interact with Meta services in the coming years.
In addition to falling short of expectations at the midpoint of the guidance range for next quarter's revenue, Meta admitted that higher infrastructure investment and legal costs will make total spending this year at $96 billion to $99 billion, which is equivalent to an increase of $2 billion from the previous forecast of $94 billion.
The company reiterated its expectation that Reality Labs' operating loss will increase significantly year-over-year and significantly raised its capex forecast for this year to $35 billion to $40 billion, up from its previous guidance of $30 billion to $37 billion, as it accelerated infrastructure investments to support its AI roadmap. Capital expenditures are expected to continue to increase next year.
Why does it matter?
The market has been volatile in recent weeks, with Meta, which is up 40% this year, recording its biggest weekly drop since August last week, and its latest quarterly report could test the social media giant's quick pivot to the metaverse and AI.
Meanwhile, this week's big tech earnings reports on AI will not only shed light on how giants plan to allocate their AI infrastructure budgets and whether AI continues to be involved in boosting profits and growth, but may also provide a much-needed catalyst for a stressed market, setting the tone for the rest of the earnings season and even reinvigorating market momentum.
However, with Wall Street expectations rising ahead of Meta's earnings report, Evercore ISI is worried that Meta will repeat last week's Netflix earnings report that beat expectations but the stock price fell in response:
"Meta and Netflix are both in the consumer internet space, and Meta may need to clearly exceed expectations and raise its guidance to maintain current stock price levels, which is already a high threshold. ”
What do you focus on most?
Investors will be watching closely for more details on the progress of the AI and how Meta plans to apply these tools to further improve advertising strategies and user engagement, including new features such as the Reels short-form video product and the chat app Click-to-Messenger.
Although Meta is promoting AI research, betting on the virtual reality metaverse, and selling related hardware products such as headsets, digital advertising accounts for about 97% of the company's revenue for many years, so how to maintain advertising growth is still the most important focus in the market.
At the same time, with Meta last week launching Llama 3, the "most powerful open-source large language model to date", upgrading the artificial intelligence assistant Meta AI, and announcing a series of blockbuster AI initiatives such as the opening of the mixed reality operating system Meta Horizon OS this week, the market will be highly concerned about huge expenses and costs.
Meta is redesigning its data centers, creating custom computing chips, and buying hundreds of thousands of Nvidia's highest-end chips in an effort to meet its AI ambitions, according to analysts. The company has raised the upper limit of its capex guidance for this year by $2 billion to $37 billion, and raising its spending guidance again in the first quarter could raise concerns unless revenue growth remains on track.
Global investment research firm Third Bridge pointed out that Meta has undergone a fairly significant shift in a relatively short period of time, from restructuring and layoffs at the end of 2022 to 2023 being defined as a "year of efficiency", and its revenue growth is indeed accelerating:
"If the company is achieving significant growth and exceeding expectations, investors seem to have more patience with a significant increase in capex and operating expenses in tandem. But in 2022, its expenses continued to grow rapidly, while revenue growth slowed, and the stock price struggled at the time. ”
What do you think of Wall Street?
Analysts such as Wells Fargo and JPMorgan Chase are concerned that Meta's strong Q1 earnings report has been fully priced in, and that its high growth may cool in the coming quarters, and that new catalysts will be needed to maintain advertising momentum:
"Due to base pressure compared to 2023 results and market expectations for a lack of new drivers this year compared to last year, people are becoming more cautious about the Meta growth deceleration that will almost certainly occur after Q1. ”
Brokerage Bernstein believes that direct ads on chat apps, monetization of business SMS within WhatsApp, and generative AI-driven advertising product innovation are all catalysts for Meta's growth. Goldman Sachs is also bullish on the strength of Meta's digital advertising and the continuous improvement of digital platform products such as short-form videos in the long term, especially Instagram Reels, which may be a key driver of revenue growth in the coming years.
BofA believes that Meta is still in the early stages of an AI-led monetization cycle (including Reels short-form videos, text messaging, and AI-driven ad revenue improvements), that the market price of the company's AI assets is undervalued, and that Meta could be a major beneficiary of TikTok's restriction bill, which the U.S. government requires to be divested from Chinese company ByteDance within nine months to a year.
Meta also faces regulatory concerns. In February, eight European consumer groups accused Meta of violating EU privacy rules when collecting user data. The European Union's data protection authority said last week that Meta and other large online platforms should allow users to use their services for free and without the interference of targeted advertising.
Some analysts also said that last week's upgraded Meta AI assistant was the company's biggest AI initiative ever, but it has quickly sparked controversy. It is alleged to pretend to be the parent of a gifted child with a disability and to try to sell items that do not exist.
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