Yahoo Finance Meta earnings recap: Stock climbs as advertising drives revenue beat, while Zuckerberg doubles down on AI spending
Meta's Q2 revenue and earnings beat estimates Wednesday, driven by strength in its ads business.
It's still spending big on Reality Labs and expects significant capex growth in 2025 for AI.
CEO Mark Zuckerberg reiterated it'll take time to see a significant return on its AI investments.
Meta reported second-quarter earnings on Wednesday after the closing bell, and it looks like another win for Mark Zuckerberg.
The Facebook parent's revenue and earnings-per-share beat consensus analyst estimates, driven by better-than-expected advertising sales.
Like other tech giants, Meta has been heavily investing in generative AI with little to show for it so far, but CEO Zuckerberg defended its spending plans in the earnings call Wednesday.
"Before we're really talking about monetization of any of those things by themselves, I don't think anyone should be surprised I would say that would be years," he said, noting that "the early signals on this are good."
Zuckerberg also said in the earnings release that the company's chatbot, Meta AI, is on pace to become the most widely used in the world by the end of 2024.
Meta's stock rose more than 6% in after-hours trading shortly after the results. The stock rose 2.5% on Wednesday, and has gained a robust 34% so far in 2024.
Meta expects headcount to be "meaningfully higher" at the end of this year than the end of 2023
Asked about head count, CFO Susan Li said, "We continue to be disciplined about where we're allocating new head count to ensure it's really focused on our core company priorities."
Meta expects its head count at the end of this year to be "meaningfully higher than where we ended 2023," she added.
After laying off more than 20,000 workers since late 2022, Zuckerberg proclaimed 2023 the "year of efficiency" at Meta.
Zuckerberg reiterates AI spending is a long-term bet
In the Q&A portion of the call, Meta execs were asked right out of the gates about the company's spending on AI and when Meta might see bigger returns from it.
Zuckerberg reiterated that it'll be a while before Meta sees notable revenue from its AI investments, emphasizing, "We have a relatively long business cycle."
"But before we're really talking about monetization of any of those things by themselves, I don't think anyone should be surprised I would say that would be years," he said. But "the early signals on this are good."
Meta CFO Susan Li said the company categorizes its AI investments as core AI and generative AI, the latter of which the company does not expect to be "a meaningful driver of revenue" this year.
"We feel like we have a good framework in palace in terms of thinking about where the opportunities are and making sure we have the flexibility to deploy it where it makes the most sense," she said.
Mark Zuckerberg talked through Meta's spending plans
One of Meta's big focuses is "figuring out the right amount of infra" for the AI future, CEO Zuckerberg said on the investor call. Meta is planning the compute clusters and data for the next several years, he said, but it's "hard to predict" how that'll pan out.
But "I'd rather risk building capacity before it's needed rather than too late," he added.
BI chief correspondent Peter Kafka had this takeaway:
"He's justifying AI/GPU spending two ways. One is explicit: 'I'd rather have too much than not enough.' The other is implicit: 'Who else is going to keep up with us, spending-wise?'"
Reality Labs keeps bleeding money
In Q2, Reality Labs, responsible for Meta's work in AR, VR, and the metaverse, had $353 million in revenue and an operating loss of $4.48 billion.
"For Reality Labs, we continue to expect 2024 operating losses to increase meaningfully year-over-year due to our ongoing product development efforts and investments to further scale our ecosystem," the earnings release said.
Meta's earnings and revenue beat should help assuage some investors' concerns for now
"Any apprehensions investors may have had about Meta's spending on AI and the metaverse are likely to be allayed by this quarter's results," said Max Willens, an analyst at Emarketer, a sister company of Business Insider.
"While impression growth has slowed a bit, Meta's careful introduction of ads on Reels has led to a perfect storm of rising impressions and rising ad prices. With its margins as healthy as they are, Meta's investors should feel comfortable with the company's vigorous investments in its plans for the future."
Investors are keeping a close eye on spending in the AI race this earnings season
Meta's total costs and expenses for Q2 were $24.22 billion, up 7% year-over-year.
The company expects its total expenses for the full year to be somewhere between $96 to $99 billion.
The company expects capital expenditures for the full year to be in the range of $37 to $40 billion, higher than its previous range of $35 to $40 billion.
"While we continue to refine our plans for next year, we currently expect significant capital expenditures growth in 2025 as we invest to support our artificial intelligence research and product development efforts," Meta's earnings release said.
Meta beats 2nd-quarter sales and EPS estimates
2nd quarter
Revenue: $39.07 billion, +22% y/y, estimate $38.34 billion
Advertising revenue: $38.33 billion, +22% y/y, estimate $37.57 billion
Family of Apps revenue: $38.72 billion, +22% y/y, estimate $37.76 billion
Reality Labs revenue: $353 million, +28% y/y, estimate $376.9 million
Other revenue: $389 million, +73% y/y, estimate $344.6 million
Operating income: $14.85 billion, estimate $14.59 billion
Family of Apps operating income: $19.34 billion, +47% y/y, estimate $18.69 billion
Reality Labs operating loss: $4.49 billion, +20% y/y, estimate loss $4.53 billion
Operating margin: 38% vs. 29% y/y, estimate 37.7%
EPS: $5.16 vs. $2.98 y/y, estimate $4.72
Ad impressions: +10% vs. +34% y/y, estimate +13%
Average price per ad: +10% vs. -16% y/y, estimate +5.96%
Average Family service users per day: 3.27 billion, +6.5% y/y, estimate 3.22 billion
Third quarter
Revenue: $38.5 billion to $41 billion, estimate $39.16 billion
Full-year 2024
Capital expenditure: $37 billion to $40 billion, saw $35 billion to $40 billion, estimate $37.53 billion
Total expenses: $96 billion to $99 billion, estimate $97.73 billion
Meta's consensus second-quarter revenue estimate is $38.34 billion
2nd quarter
Revenue estimate: $38.34 billion
Advertising rev. estimate: $37.57 billion
Family of Apps revenue estimate: $37.76 billion
Reality Labs revenue estimate: $376.9 million
Other revenue estimate: $344.6 million
Operating income estimate: $14.59 billion
Family of Apps operating income estimate: $18.69 billion
Reality Labs operating loss estimate: $4.53 billion
Operating margin estimate: 37.7%
EPS estimate: $4.74
Ad impressions estimate: +13%
Average price per ad estimate: +5.96%
Average Family service users per day estimate: 3.22 billion
Third quarter
Revenue estimate: $39.17 billion
Full-year 2024
Total expenses estimate: $97.73 billion
Capital expenditure estimate: $37.57 billion
Meta stock rises roughly 2% ahead of 2nd-quarter earnings report
Meta stock rose about 2.3% in intraday trades on Wednesday, slightly behind the Nasdaq 100's gain of about 2.7%.
Meta stock has been a roller coaster ride for investors this year.
While the stock is up 34% year-to-date, more than double the Nasdaq 100's gain of about 15%, it's down 13% since it hit a record high on July 8 and it experienced a one-day decline of more than 10% after it reported first-quarter earnings in April.
Citi wants to see Meta's big AI investments translate into increased engagement.
A solid advertising environment should help Meta deliver better-than-expected second-quarter earnings and revenue, according to a recent note from Citi.
"Our 2Q advertising checks and time at Cannes suggest that the broader online advertising market is healthy and strengthening," Citi analyst Ronald Josey said.
"We'll be watching for continued engagement benefits from Meta's investments in AI content discovery, adoption of newer monetization tools, early progress from the beta launch of AI studio, potential benefits from Llama 3.1, and profitability. Meta remains our top-pick across our coverage," Josey said.
Citi has a "Buy" rating on Meta with a $550 price target.
Wells Fargo says internal checks point to a solid advertising environment in the second quarter
Wells Fargo raised its second-quarter estimates in a recent note as its internal checks suggests solid ad performance from the company.
"Checks suggest noticeable ad targeting and efficiency improvement in 2Q despite meaningful CPM growth acceleration," Wells Fargo analyst Ken Gawrelski said.
The bank also expects Meta to maintain its prior capital expenditures guidance of $35 billion to $40 billion for the year.
"Given the unfavorable market reaction to 1Q mgmt commentary on potential revenue displacement due to scaling of newer AI products, believe investors will welcome further framing of potential impact," Gawrelski said.
Wells Fargo has an "Overweight" rating on Meta with a $625 price target.
Investors are concerned about Meta's spending plans for AI and the metaverse, Mizuho says
Mizuho said in a recent note that investor concerns about Meta's massive investment cycle has kept Wall Street expectations "in check."
But that means overall expectations may prove to be too conservative.
"We believe risk/reward appears positive on Meta into the print with solid 2Q24 ad agency tracking, achievable 3Q24 expectations, and flexibility in opex to manage raising capex," Mizuho analyst James Lee said.
"At the same time, we view consensus FY24 growth of 17% conservative with improved ad pricing growth from Reels, Amazon's integration into FB shops, and special events revenue growth," Lee added.
Mizuho has an "Outperform" rating on Meta with a $575 price target.
The presidential election should be a boon for Meta's digital advertising, Bloomberg Intelligence says
The upcoming Presidential election and its related advertising spend should benefit Meta in a big away, according to Bloomberg Intelligence analyst Mandeep Singh.
"Meta's impressions and user growth may taper with ad pricing and election-ad spending to be key drivers for surpassing consensus sales growth expectations of 20% in 2Q," Singh said in a recent note.
The company also has the potential to offer guidance on the monetization potential of its licensing of Llama, its open-source large language model.
"Though Meta's positioning remains strong in gen AI, a top-line lift from licensing its Llama model to enterprise customers and adoption of subscription chatbot offerings, similar to OpenAI and Gemini Advanced, will be a key focus on the earnings call," Singh said.
Bank of America says a potential TikTok ban in 2025 could boost Meta's ad platforms
Bank of America said in a recent note that it expects Meta to meet or slightly beat Wall Street's expectations for second-quarter revenue, and beat profit estimates.
"With job openings down in 2Q, we don't anticipate a repeat of last quarter's higher '24 expense guidance, though higher legal and capex are risks," Bank of America analyst Justin Post said.
Looking forward, Post highlighted that a potential TikTok ban in early 2025 could provide a big boost to Meta's advertising business.
"With political spend, and potential TikTok ban in 1Q'25, Meta could also see an ad spend benefit in 2H'24," Post said.
Bank of America has a "Buy" rating on Meta with a $550 price target.
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