Meta’s stock tanks 15 per cent as AI spending rises, revenue outlook fails to impress

Shares of Meta, the parent company of Facebook and Instagram, experienced a significant drop of more than 15 per cent during after-hours trading.

This decline came after Meta announced higher-than-expected expenses for artificial intelligence (AI) and issued a cautious revenue forecast, which overshadowed its strong first-quarter performance. 

“The acceleration in Q1 revenue growth to 27 per cent y/y is likely being overshadowed by the implied Q2 revenue growth deceleration to 18 per cent y/y at the mid point below consensus 20 per cent and increases in the FY24 total expense and capex outlooks. However, we believe in Meta’s successful track record of generating meaningful returns from prior investment cycles,” noted Brent Thill, Equity Analyst at Jefferies.

“In our view, Meta is capable of $24 of EPS in FY25, which at a 22x multiple gets to a $540 stock.”

Meta reported impressive earnings for the first quarter, with revenue climbing 27 per cent to reach $36.46 billion. This marked the fifth consecutive quarter of accelerated growth for the company.  

Net income also saw a substantial increase, more than doubling to $12.37 billion, or $4.71 per share, compared to $5.71 billion, or $2.20 per share, in the same period last year. 

A significant factor contributing to the surge in net income was a notable decrease in sales and marketing expenses, which dropped by 16 per cent from the previous year. Additionally, advertising revenue, Meta’s primary source of income, saw a significant increase of 27 per cent in the first quarter, reaching $35.64 billion. 

Meta attributed its growth to several factors, including a stabilizing economy and increased spending from Chinese discount retailers like Temu and Shein.  

However, analysts have raised concerns about the potential impact of a slowdown in Chinese advertising spending in the future. 

“Meta highlighted on the prior call that China-based advertisers accounted for 10 per cent of overall revenue and contributed 5 points to revenue growth in 2023. While impressive, Meta cautioned that the level of growth from these advertisers seen in 2023 will likely be hard to replicate in 2024 given the much larger base,” Jefferies’ Thill added.

Looking ahead, Meta expects second-quarter sales to fall between $36.5 billion and $39 billion, with a midpoint of $37.75 billion, slightly below analysts’ expectations of $38.3 billion. 

Additionally, Meta revised its expense forecast for the year, anticipating higher investments in new AI products and computing infrastructure. The company now projects total expenses for 2024 to be between $96 billion and $99 billion, with capital expenditure ranging from $30 billion to $40 billion. 

Following the announcement, Meta’s stock price plummeted to $418.85 in extended trading, resulting in a market capitalization drop to approximately $1 trillion. This decline erased nearly $200 billion from its market value. 

Despite this setback, Meta has had a strong performance year-to-date, with over a 40 per cent increase in its stock price. The company’s involvement in generative AI has been a significant driver of its growth, leading to a new record high earlier this month. 

In an interview with The New York Times, Thomas Monteiro, a senior analyst at Investing.com, stated, “Meta’s earnings should serve as a stark warning for companies reporting this earnings season.”  

Despite the company’s robust results, Monteiro emphasized that “it didn’t matter as much as the reported lowering revenue expectations for the current quarter.” He added, “Investors are currently looking at the near future with heavy mistrust,” as reported by The New York Times.

Poor forecasts from Meta Platforms, the parent company of Facebook, have had a domino effect, triggering a sell-off in tech and tech-related stocks during after-hours trading. 

Asian stocks dip as Meta sparks a tech rout, with Japan’s Nikkei N225 plummeting nearly 2%, and Chinese stocks, including the CSI300 index, also taking a hit, alongside a 0.5% dip in Hong Kong’s Hang Seng Index.

 “Buy on Weakness. Meta now has a dividend and buyback program. We see a bigger unlock of a new category of shareholders at these levels, given reasonable growth-adjusted valuation, and being the least expensive of the Magnificent 7,” said Rohit Kulkarni, Managing Director at Roth Capital Partners.

“Also, this reaction illustrates that a clean beat and raise won’t suffice, and yellow flags are likely to be severely punished in this ongoing earnings season.”