Meta’s strong quarter quells concerns that its aggressive AI spending is misguided
Meta Platforms shares jumped Wednesday after the social media giant delivered a strong first quarter and signaled its intentions to keep spending on artificial intelligence. Revenue in the three months ended March 31 climbed 16.1% year over year to $42.31 billion, beating the consensus estimate of $41.39 billion, according to LSEG. Earnings per share (EPS) soared 36.5% on annual basis to $6.43, trouncing expectations of $5.27, LSEG data showed. Shares of Meta added more than 4% in the after market, trading at nearly $575 apiece. The stock ended Wednesday’s regular session down more than 25% from its all-time high in February, part of the broader slump in tech stocks and other names that could be hurt by a tariff-induced economic slowdown. META YTD mountain Meta’s year-to-date stock performance. Bottom line Meta’s first-quarter numbers were excellent: Sales, daily active users, earnings per share and operating margins all exceeded estimates. The company’s profitability, in particular, stands out and should help allay fears that CEO Mark Zuckerberg is spending too aggressively on AI. The positive market reaction on Wednesday night supports that viewpoint. The reason: If we had to step back and identify the biggest “problem” with the report, it might be that Meta increased its 2025 capital expenditures guidance range to $67 billion at the midpoint, up $4.5 billion from the outlook provided in late January in the wake of the panic over Chinese AI startup DeepSeek . This time around, Meta’s capex increase follows weeks of speculation on Wall Street about whether any deep-pocketed technology firms would reduce their AI spending as President Donald Trump’s trade war dampened economic growth projections. In the not-too-distant past, Meta’s stock has been slammed because its capex plans were steeper than expected . For now, investors are being more receptive. Why? Some of it could be that it simply wasn’t that big of an increase. A more significant reason could be that Wednesday’s release is simply further evidence that Meta’s AI investments are paying off, which makes additional spending to accelerate them defensible. On Wednesday night, we heard more comments and data that explain how AI is making apps including Facebook and Instagram more engaging for users, and improving its ad targeting capabilities for companies so they spend more of their marketing dollars on its platforms. On the earnings call, CEO Mark Zuckerberg and CFO Susan Li both cited internal statistics showing that AI recommendation algorithms are driving increased engagement and better returns for advertisers. For example, Li said a new model for ad recommendations being tested on Facebook Reels has led to an up to 5% increase in ad conversions. Meanwhile, Zuckerberg said new improvements to its content recommendation systems has sparked a 7% increase in time spent on Facebook over the past six months, along with a 6% increase on Instagram and a 35% boost on Threads, its still-nascent microblogging site that rivals Elon Musk’s X. Meta Platforms Why we own it : Meta Platforms dominants the world of targeted advertising with excellent technology, and its strong user engagement makes it a great place to advertise. The company’s scale provides the financial power and employee talent needed to pursue new growth avenues such as artificial intelligence, the metaverse, and virtual and augmented reality projects. Improved profitability in recent years has been a boon to earnings. Competitors : Alphabet , TikTok (owned by China’s ByteDance) and Snap Weight in portfolio : 4.11% Most recent buy : Sept. 6, 2022 Initiated : May 29, 2014 There are a few potential headwinds in Europe and Asia to monitor that we’ll discuss in detail later in the story, and the evolving economic landscape remains something to watch given that historically slower economic growth pressures advertising spending. Still, Meta delivered in a big way Wednesday night and reaffirmed our belief that it is among the AI winners investors should own. We’re reiterating our 2 rating and adjusting our price target to $700 from $750 to account for elevated macro uncertainty and lower market multiples. Quarterly commentary The chart above is primarily filled with green, a visual representation of just how good these first-quarter results were versus Wall Street expectations. One place where we see red is revenue for Reality Labs — home to sales of Ray-Ban Meta’s smart glasses, Quest virtual reality headsets and its metaverse ambitions more broadly — which came in at $412 million compared with the FactSet consensus of $493 million. Not only is this a very small part of the overall business, but Reality Labs’ operating loss, while still quite sizable, was narrower than expected. Outside of the U.S., Meta’s geographic revenue was responsible for the other misses in the quarter — and there are some less-than-ideal dynamics here to watch out for going forward. Finance chief Li said a recent decision from European regulators regarding Meta’s compliance with the Digital Markets Act (DMA) could require the company to “make some modifications” to its business model in ways that both worsen the user experience and cause a “significant impact” to its revenue in that region as soon as the third quarter of 2025. While Li said it’s too early to say what those changes could be, she said Meta is actively engaged with the European Commission on the matter. Europe was 16% of total revenue in 2024, she noted. Secondly, Li said Meta in April has started to see a slowdown in ad spending from Asia-based online retail exporters — likely due to the impending closure of a trade loophole that allowed packages worth less than $800 to enter the U.S. tariff free. That loophole was huge for the growth of e-commerce firms like Temu, and Meta benefited greatly in recent years from their increased ad spending to court American customers. To be sure, Li’s comments are not surprising because last week executives at Google parent Alphabet offered similar observations. Still, what this means for Meta’s overall growth in the quarters ahead will be something to monitor. Li said Meta’s second quarter guidance incorporates these April trends from Asian advertisers (more on that in a second). Guidance Meta expects second-quarter revenue in the range of $42.5 billion to $45.5 billion, which at the midpoint matches consensus expectations of $44.03 billion. As mentioned, the company also upped its full-year capital expenditures outlook to $64 billion to $72 billion — previously, the range was $60 billion to $65 billion. The updated capex figure accounts for additional data center investments to support its AI efforts, as well as “an increase in the expected cost of infrastructure hardware,” Li said on the call. Li said Meta made some adjustments to its building strategy that will enable the company to more quickly get data centers up and running. “Even with the capacity that we’re bringing online in 2025, we are having a hard time meeting the demand for compute resources across the company,” Li said. As for the expected increase in infrastructure hardware costs, Li said did not mention tariffs directly. However, she said it “really comes from suppliers who source from countries around the world.” She added that with the uncertainty around trade discussions, Meta wanted to provided a wider capex range to account for the potential impact that could be felt. Meanwhile, Meta modestly lowered its 2025 total expenses guidance to $113 billion to $118 billion, down $1 billion on both ends of the range. Li said this reflects updated expectations on employee compensation and other operating expenses not related to headcount, partially offset by higher capex and cost of goods sold in the Reality Labs division. (Jim Cramer’s Charitable Trust is long META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Mark Zuckerberg, chief executive officer of Meta Platforms Inc., during the Acquired LIVE event at the Chase Center in San Francisco, California, US, on Tuesday, Sept. 10, 2024.
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Meta Platforms shares jumped Wednesday after the social media giant delivered a strong first quarter and signaled its intentions to keep spending on artificial intelligence.