ii view: Meta tags higher investment spending in AI arms race

Third-quarter results to 30 September

• Revenue up 19% to $40.6 billion
• Adjusted earnings per share up 37% to $6.03
• Quarterly dividend payment of $0.50 per share, unchanged from Q1

Guidance:

• Expects fourth-quarter revenue in the range of $45-48 billion
• Expects full-year capital expenditure of $38-40 billion, up from a previous $37-40 billion estimate
• Expects capital expenditure to continue growing significantly in 2025

Chief Executive Mark Zuckerberg said:

"We had a good quarter driven by AI progress across our apps and business." 

"We also have strong momentum with Meta AI, and AI-powered glasses."

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ii round-up:

Facebook owner Meta Platforms Inc Class A (NASDAQ:META) detailed sales and earnings that beat Wall Street forecasts, but with investment including that for artificial intelligence increased this year and expected to grow significantly next year. 

Corporate demand to advertise across its social media apps pushed third-quarter revenue up 19% to $40.6 billion, fuelling earnings growth of 37% to $6.03 per share. Daily active users of 3.29 billion missed forecasts of 3.31 billion. Capital expenditure for 2024 is now expected at between $38-40 billion, up from a previous $37-40 billion and an earlier year guess of as low as $35 billion.

Shares in the Nasdaq 100 company fell 4% in post results US trading having gained 67% year-to-date. That’s comfortably ahead of a 21% increase for the tech index itself. Fellow advertising focused tech rival and owner of Google, Alphabet Inc Class A (NASDAQ:GOOGL), is up 25% year-to-date. 

Meta operates across the two businesses of Apps including Facebook, Instagram, Messenger and WhatsApp, as well as Virtual Reality (VR) gaming and metaverse interests under its reality labs division. 

Profits at the core app division hit $21.8 billion in the quarter, up from $17.5 billion a year ago. Losses at reality labs increased to $4.3 billion, up from $3.7 billion in Q3 2023, generating total year-to-date losses of $12.76 billion.

Meta flagged that more than a million advertisers had used its generative AI advertising tools during this latest quarter. Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results. 

ii view:

Founded in 2004 by Mark Zuckerberg, Meta today employs just over 72,000 people. Ad impressions via the group’s family of apps rose 7% year-over-year, with the average price per ad climbing 11%. Geographically, the US generated its biggest chunk of revenue in 2023 at 37%, followed by Europe at 23%, Asia-Pacific at 17%, China and the Rest of the World each at just over 10% and Canada the balance of 2%. 

For investors, investments such as those being made by Meta in AI are never guaranteed to pay off. The group’s Reality Labs business continues to generate losses. Government concerns globally regarding possible misinformation potentially spread by social media persist, while heightened geopolitics and the start of conflicts, such as that impacting Israel, have in the past resulted in at least an initial corporate reluctance to advertise. 

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More favourably, Meta is flagging robust use of its own AI tech to help tailor and target advertising. A broad focus by management on costs remains. The previous commencement of a dividend payment could increase its shareholder base to include those seeking a progressive annual payment, while share buybacks totalled $8.86 billion during this latest quarter.

In all, and with social media here to stay and Meta now a core tool for corporate advertisers, investor are likely to remain interested in this tech titan.

Positives

• Broad base of 10 million plus advertisers
• Cash and cash equivalents held of $70.9 billion

Negatives

• Uncertain economic outlook
• A series of scandals have previously impacted

The average rating of stock market analysts:

Buy