Shares of Meta Platforms (META) took a nosedive Thursday morning, plummeting as much as 16% following the release of its first-quarter earnings report. Despite surpassing Wall Street expectations, the social media giant’s stock remains down even now.
Meta’s earnings release revealed impressive growth. Revenue surged 27% year over year to $36.4 billion, and expenses grew at a much slower 6%. This resulted in a robust operating margin of 38% (up from 25% last year) and fueled a stunning 114% jump in earnings per share (EPS) to $4.71. These results easily exceeded analysts’ projections of $36.14 billion in revenue and $4.32 in EPS.
Furthermore, Meta highlighted a positive 7% year-over-year increase in its user base to 3.24 billion, with advertising impressions surging by 20%.
So what’s the reason for the sudden market selloff?
The AI Factor
Meta’s aggressive plans for artificial intelligence (AI) and the associated spending spree triggered the stock drop. The company raised its full-year capital expenditure forecast to a range of $35 billion to $40 billion, significantly higher than its previous estimate range of $30 billion to $37 billion. The company indicated this increased investment is primarily intended to support its AI ambitions, and that spending will ramp up even further in 2025.
The 2023 arrival of generative AI has sparked intense competition in the tech world, as companies scramble to incorporate these advanced algorithms into their products. Given its eye-popping resources, Meta is well-positioned to develop the powerful large language models that are essential for generative AI.
In fact, Meta’s Large Language Model Meta AI (LLaMA) is considered one of the best AI systems globally, however CEO Mark Zuckerberg did concede that the company is investing in and scaling this new product without an immediate monetization strategy.
Despite the spending-induced stock decline, analysts remain surprisingly optimistic. Jefferies analyst Brent Thill suggests investors “buy the [Zuckerberg] shopping cart dip,” highlighting Meta’s current attractive valuation of “just” 22 times forward earnings. I think that’s excessive for a company that has effectively stopped growing.
Meta’s current situation highlights the inherent tension between near-term profits and long-term innovation. Investing heavily in AI carries significant risk, particularly without a clear monetization timeline. However, the potential rewards are equally immense. This dilemma presents investors with a classic decision — prioritize immediate returns or potentially participate in the early stages of a transformative technology.
Ultimately, before making any investment decision we must weigh our individual risk tolerance and belief in Meta’s ability to execute and truly capitalize on its ambitious AI roadmap.