Mark Zuckerberg's message this week was clear: Meta Platforms will spend big to be an artificial intelligence leader. Can Meta stock still thrive now that the "Year of Efficiency" is over?
The initial response on Wall Street suggests it's complicated. Meta stock slid 10.5% on Thursday as investors digested the social media giant's first quarter earnings report. The company's results topped expectations. But then the Facebook parent company paired a lower-than-expected Q2 revenue forecast with a higher-than-expected increase in projected 2024 costs.
For some investors, it may have been 2022 all over again. The was when Meta's shares tanked after Zuckerberg detailed a step-up in spending for the company's metaverse ambitions. But analysts point to key differences in today's environment — which could be a good thing for Meta stock.
Meta's March quarter featured "the highest top-line growth rate in over two years and a far cry from the revenue declines in 2022," Evercore ISI analyst Mark Mahaney told clients in a Thursday note. The note was titled "This Time It's Different."
Still, Zuckerberg's comments marked a big shift from the formula that carried Meta back to a trillion-dollar valuation. Meta gained 194% in 2023 as it returned to double digit sales growth and cut costs in what Zuckerberg branded as a Year of Efficiency. And even the Facebook leader acknowledged that a return on AI investments will take patience.
Meta Stock Enters New Investment Cycle
Zuckerberg stressed to analysts Wednesday that early results for Meta's AI chatbot and Llama large language model prove the company "should invest significantly more over the coming years" on its AI ambitions.
With its latest earnings report, Meta raised its guidance for 2024 capital expenditures by 12%, to $37.5 billion at the midpoint of its range. The company also upped the midpoint of its total expenses about 1%, to $97.5 billion. The high-end of Meta's capex guidance, $40 billion, would represent a 42% increase from 2023. Capex decreased 12.5% year over year in 2023.
To Mizuho analyst James Lee, it was Zuckerberg's commentary that stuck out.
"The biggest surprise in the quarter was not the lower-than-expected revenue guidance or elevated capex; rather, it was that Meta will be in an investment cycle in the foreseeable future," Lee wrote in a client note Thursday.
Zuckerberg acknowledged that Meta stock has "historically seen a lot of volatility" when it enters new investment cycles. But he said spending to improve its app has "been a very good long-term investment for us, and for investors who have stuck with us."
Mark Zuckerberg's AI Vision
The capex includes spending on chips, such as those by Nvidia, and redesigned data centers to power Meta's new AI tools.
Zuckerberg acknowledged AI is a long-term project. But he envisions investments paying off with a "massive business" from AI-powered enterprise messages and ads within AI chatbot interactions, among other products.
There are some early signs of progress. About 30% of content on Facebook is AI recommended. The AI-powered Reels short-video app contributed about half the time users spent on Instagram last quarter, Zuckerberg said.
Further, Meta said in February that its AI-powered Advantage+ tools for advertisers had reached a $10 billion annual run rate. The company did not provide an updated metric on the earnings call.
But New Street Research analyst Dan Salmon wrote that the exact value of those metrics is difficult to quantify, outside of the Advantage+ revenue.
"As such, there remains no visible revenue return on Meta's generative AI investments, whereas we think both Google and Amazon will be able to show (and hopefully quantify, as Microsoft did) the impact of generative AI on their cloud divisions," Salmon wrote Wednesday, prior to Google and Microsoft reporting results late Thursday.
Additionally, Meta's AI focus hasn't stopped its investments in the metaverse. The company's Reality Labs division posted an operating loss of $3.85 billion in the first quarter, with the company's guidance warning that it expects operating losses to "increase meaningfully year-over-year."
The company believes its AI efforts can help establish the longer-term metaverse vision. Zuckerberg pointed analysts toward Meta's Ray-Ban smart glasses, which come with a voice-activated Meta.ai assistant.
Meta Stock: Core Ad Business Remains Strong
But the harsh reaction immediately following the firm's earnings report underlined the skepticism about spending on AI, as well as the metaverse. Monness, Crespi, Hardt analyst Brian White described the reaction as "AI fever" claiming another victim.
Still, White maintained a buy rating for Meta. Overall, analysts appear ready to give Meta the benefit of the doubt. About 85% of the 66 analysts following Meta rate the stock a buy, according to FactSet. That's the same as prior to the report. In late 2022, Meta's support dipped to 63% of analysts, according to FactSet, with the rest holding either neutral or sell ratings.
It helps that the high-margin digital advertising business that drives nearly all of Meta's revenue is healthy. The company's 27% sales growth in the first quarter was its best mark since Q3 2021.
"Without sounding overly religious, you either believe in Zuck or you don't, and we do," wrote Bernstein analyst Mark Shmulik. "The advertising revenue growth trajectory is as expected … and top-end of the 2Q guidance range point to 22% year-over-year (growth) against tougher compares. Who would have thought that was possible a year ago?"
In 2022, Meta's sales declined 1.1% year over year. The company posted a meager 3% year-over-year sales increase for the first quarter of 2023. Revenue growth has ramped up each quarter since then. However, Meta officials expect growth to decelerate slightly for the current quarter, which it pinned on tougher year-over-year comparisons.
"Unlike the prior cycles, we note that revenue growth is not eroding, and (Meta) has a track record of monetizing faster than expectations," wrote Lee of Mizuho.
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Meta Still Has A Big Cash Pile
Meanwhile, Meta still has a lot of cash despite the elevated spending. In March, Meta paid out its first-ever dividend to investors and it continues to buy back stock.
Jefferies analyst Brent Thill said he was "impressed" by Meta's 38% operating income margin for the quarter, up from 25% in the same period a year earlier. Meta generated $12.8 billion in free cash flow in the first quarter, which Thill said was the second highest of any quarter in company history.
"We believe Meta's robust FCF generation allows them to continue funding innovation while also returning cash to shareholders," Thill wrote in a client note Thursday.
Still, the surprise jump in spending, and guidance miss, means Meta stock is spending some time in the penalty box. Shares traded lower for much of Friday before recovering to a half-percent gain at 443.29 on the stock market today. But following Thursday's slide, Meta's 40% gain in the first three months of 2024 has been cut near in half.
BofA Securities analyst Justin Post wrote Thursday that the "momentum cycle" for Meta stock is likely over. But he maintained a buy rating.
"While we expect stock volatility on concerns on revenue deceleration and increasing AI investments, we remain positive on Meta as the Reels, Messaging, and Al driven ad improvements still have several quarters to play out," Post wrote.
