Meta Platforms Is Paying the Price of High Expectations

May 10, 202414:00 UTC

Meta Platforms Inc. META reported first-quater 2024 earnings on April 24. In a statement, founder and CEO Mark Zuckerberg said, "This is a good start to the year." However, despite his positive assessment, the market was clearly disappointed with the company's results and second-quarter guidance as itsstock dropped 12% after the earnings release, which has been a rare occurrence over the past few quarters.

The last time Meta's stock plummeted was on Oct. 27, 2022, following the company's dismal third-quarter 2022 earnings report. It is obvious that while the first-quarter results were more than satisfactory, investors' expectations were indeed too high.

Highlights of the quarter

Meta reported revenue of $36.50 billion, an all-time high for a first quarter, representing year-over-year growth of 27.30%. This is the fastest revenue growth rate since the third quarter of 2021. However, investors were disappointed the company did not achieve its upper range of guidance of $37 billion. Meta's net income was $12.40 billion, also a record for the first quarter.

The Family of Apps segment was the main driver for Meta's revenue growth. The Family of Apps segment reported revenue of $36 billion, growing 27% year over year. Of the $36 billion segment revenue, ad revenue was $35.60 billion, also up 27% year over year. The growth of ad revenue is very healthy as it was driven by both volume and pricing. In the first quarter, ad volume (total number of ad impressions) grew 20% while pricing (average price per ad) grew 6%. Meta Chief Financial Officer Susan Li explained during the earnings call thatwithin ad revenue, the online commerce vertical was the largest contributor to year-over-year growth, followed by gaming and entertainment and media. Impression growth was mainly driven by Asia Pacific and Rest of World. Pricing growth was driven by advertiser demand.

Interestingly, when asked about contributions from Chinese-based advertisers, Li refused to quantify the first-quarter contribution from China and declined to provide expectations on quarterly China-based ad revenue. This is understandable as both Temu and Shein are facing more rigorous scrutiny from the U.S. government.

The Reality Labs segment is still burning cash. This segment's revenue for the period was only $440 million, while incurring $4.30 billion in segment expenses. The operating loss was $3.80 billion.

Starting from this quarter, Meta will no longer report daily active users and monthly active users for its Facebook platform, and it will also stop disclosing the number of monthly active people for its Family of Apps. The only number Meta will disclose going forward is its daily active people for its Family of Apps. For March, Meta's DAP for the Family of Apps was 3.24 billion, an increase of 1.57% quarter over quarter and 7.28% year over year.

Impressive progress of AI

Meta has made impressive progress on its artificial intelligence offerings over the past few months. A week before announcing its earnings results, the company released its latest version of Meta AI powered by its latest model Llama 3. According to Chatbot Arena, which is an open-source research project developed by members from Large Model Systems Organization (LMSYS Org) and UC Berkeley SkyLab, Meta's Llama 3's ranking was tied at number six. Meta's previous model Llama 2 did not even make it to the top 10 list.

Zuckerberg sounded very excited about Meta AI's progress. During the earnings call, he said:

The initial rollout of Meta AI is going well. Tens of millions of people have already tried it. The feedback is very positive. So we've started launching Meta AI in some English speaking countries, and we'll roll out in more languages and countries over the coming months. We believe that Meta AI with Llama 3 is now the most intelligent AIS system that you can freely use. We're seeing good progress on some of these efforts already. Right now, about 30% of the posts on Facebook feed are delivered by our AI recommendation system. That's up 2x over the last couple of years. And for the first time ever, more than 50% of the content that people see on Instagram is now AI recommended.

As we all know, AI models are extremely costly. Meta has invested heavily in AI capabilities and will continue to do so in the near future. For 2024, the company previously guided for capital expenditures of $30 billion to $37 billion. The company has revised the capital expenditure to $35 billion to $40 billion. This will likely adversely impact near-term earnings.

Miscellaneous items

During the quarter, Meta repurchased $14.64 billion worth of stock and paid $1.27 billion in cash dividends. Clearly, the social media giant is still committed to enhancing shareholder returns.

For the second quarter, management gave a revenue guidance range of $36.50 billion yo $39 billion, with a midpoint of $37.75 billion. The midpoint represents a year-over-year growth rate of 18%, while the upper range represents a year-over-year growth rate of 21.90%. Even if Meta can achieve the upper range of revenue growth, it would still be the slowest revenue growth rate since the third quarter of 2023. Combined with the more-than-expected capital expenditure guidance, it is not surprising that investors may have to lower their expectations for full-year 2024.

In terms of valuation, at the current market capitalization of approximately $1 trillion, Meta is trading at a trailing 12-month price-earnings ratio of 22. It does not look expensive, but also not very cheap either.

Conclusion

Investors' expectations for Meta oscillated from extremely low to extremely high between the third quarter of 2022 and the first quarter of 2024. It looks like Meta's core Family of Apps ad business will continue to grow in the near term. Going forward, clearly AI will be a big focus for both the company and investors. Personally, I cannot judge whether the huge investment in AI will generate the return on investment Zuckerberg hopes to achieve, but I know if Meta does not invest heavily in the technology, the company will fall behind in the race. Time will tell.