Meta Platforms (NASDAQ:META) stock has certainly been one of the most frustrating plays for investors to own over the past five years. The strong momentum abruptly stopped in 2022 as stocks plummeted with rising interest rates. The company prioritized profitability last year and was rewarded by the market, but this year has been challenging.
Meta’s stock price dropped 16% intraday despite beating expectations. The company announced AI initiatives and increased infrastructure spending. Weak forward guidance worries investors about a potential metaverse spending repeat. The market is misinterpreting the story on Meta.
Double Figures for Q1
Released on April 25, Thursday, Meta’s Q1 2024 earnings call highlighted some rather impressive numbers. The company’s revenue and profits both surged, driven mainly by its increased ad revenue. However, shares fell right after the company revealed cautious revenue outlook alongside higher than expected spending on AI.
According to a poll by FactSet, analysts expected a $4.32 earnings share on a revenue of $36.14 billion. However, Meta expects revenue to sit between $36 to $39 billion for the current quarter. For Q2, analysts expect a $38.25 billion revenue, which exceeds Meta’s midpoint guidance.
The company also anticipates higher 2024 capital expenses, forecasting a range of $35 billion to $40 billion.
AI Spending Plans: Reaction Gone Wrong
As mentioned earlier, META stock saw over 15% decline after-hours trading as it announced its increased spending on AI plans. CEO Mark Zuckerberg noted that it would take time for AI investments to boost revenues. Meta’s Threads now boasts over 150 million monthly users, intensifying competition with Elon Musk’s X. Analyst Mike Proulx predicts Threads could surpass X as the preferred Twitter alternative, and Meta could benefit from TikTok’s potential U.S. sale or ban.
Meta increased its AI-driven ad-buying tools and integrated more AI features into its social platforms. However, its projected spending of $35-$40 billion in 2024 (up from $30-$37 billion) overshadowed positive earnings news. The company’s Q1 revenue surged 27% to $36.46 billion, slightly exceeding analysts’ estimates. Analysts noted Meta’s strategic AI investment, which enhances user engagement amid digital advertising uncertainty.
According to Ms. Lund-Yates, more than 50 countries are holding elections this year, causing significant uncertainty for advertisers. Looking ahead, Meta’s biggest risk remains regulatory issues. Last year, Meta was fined €1.2bn by Irish data authorities for mishandling data, and in February, CEO Mark Zuckerberg faced criticism from U.S. lawmakers over child exploitation. Lund-Yates noted Meta’s resources for legal challenges but warned of market sentiment fluctuations.
AI is Key to the Outlook for META Stock
Meta’s CEO updated investors on Meta’s use of AI in its platforms, such as Facebook and Instagram. “Around 30% of Facebook posts are now delivered by our AI recommendation system,” Mark Zuckerberg said. For the first time ever, over 50% of Instagram content is AI recommended,” he added.
He described how the AI recommendation system boosts engagement and enhances ad delivery, providing more value to advertisers. Meta’s CFO, Susan Lee, also highlighted that advertisers benefit from AI through Ad Manager’s recommendation engine and GenAI features.
Investors seem to be pricing in another wave of bearish momentum following increased spending and slower-than-anticipated growth. Echoes of the metaverse spending debacle ring true in this case. However, it’s my view that Meta is a much more focused company than the market is giving it credit for. And an extra few billion here or there might be a big deal for me or you, but it’s really a drop in the bucket for a giant like Meta. I’d buy the stock on this dip.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
