Why Meta Shares Dropped 13% Despite 27% Increase In Revenue
Why Meta Shares Dropped 13% Despite 27% Increase In Revenue
Meta Platforms (NASDAQ:META), the social media and technology powerhouse, sent shockwaves through the market with its first-quarter financial results. Investors wasted no time in selling off shares, causing Meta Platforms stock to plummet and wiping out billions of dollars in company value. The reason for the panic? Meta's unexpected announcement of a more aggressive approach to investing in artificial intelligence (AI).
What is happening
In the wake of the report, Meta's stock took a beating, dropping 13% in premarket trading. This translated to a staggering loss of $160 billion in market capitalization, bringing the company's value down to $1.09 trillion. While Meta managed to surpass Wall Street's expectations for first-quarter profit and revenue, its outlook for the second quarter fell slightly short of what analysts had hoped for.
The impact of Meta's news reverberated beyond its own stock. As advertising remains a key revenue driver for the company, the weaker revenue guidance had a ripple effect on other ad-driven internet firms. Share prices of Snapchat owner Snap and Pinterest both took a hit, falling 4.7% and 3.9% respectively during premarket trading.
However, the real bombshell was Meta's ambitious spending plans on AI. The company raised its full-year capital expenditure forecast to a range of $35 billion to $40 billion, signaling a significant increase from the previously projected range of $30 billion to $37 billion. Meta explained that this surge in spending was necessary to support its AI roadmap, with further increases expected in 2025 to fuel aggressive AI research and product development efforts.
This isn't the first time Meta has faced a dramatic stock decline due to revenue concerns and large investments in cutting-edge technology. If the premarket price action is any indication, Meta might be in for one of its worst days in years, potentially marking its largest-ever single-day loss in market capitalisation since October 27, 2022, when the stock plunged 25% following disappointing revenue and ambitious projects focused on the metaverse and virtual reality. Despite the potential setback, it's worth noting that Meta's stock has soared approximately 140% over the past year.
Earnings Highlights
Meta reported first-quarter revenue of $36.45 billion, a solid 27% increase compared to the previous year. This surpassed the Street consensus estimate of $36.16 billion.
Earnings per share for the quarter came in at $4.71, beating the Street estimate of $4.33.
Meta boasted 3.24 billion Family Daily Active People in the first quarter, marking a 7% year-over-year growth.
Ad impressions witnessed a 20% surge year-over-year, accompanied by a 6% increase in the average price per ad.
Looking ahead, Meta provided guidance for second-quarter revenue, projecting it to fall within the range of $36.5 billion to $39 billion, falling short of the Street consensus estimate of $38.3 billion. Full-year 2024 expenses are expected to be in the range of $96 billion to $99 billion, up from the previous guidance range of $94 billion to $99 billion. The increase in expenses is attributed to higher infrastructure and legal costs.
Meta's Reality Labs division is anticipated to experience significant year-over-year operating losses due to intensified efforts and investments in product development. As Meta's AI roadmap takes shape, capital spending is likely to increase in the coming years.
Meta’s three-step plan to monetize AI investments
Charging Companies for Using Generative AI Tools: Meta aims to offer generative AI tools, such as services supporting automated interactions, and charge companies for their usage. This revenue stream could become a reality within the next five years.
Integrating Advertisements: Meta plans to incorporate ads or paid content into AI interactions, aligning with its core business of selling digital advertising.
Monetizing Large AI Models: Meta sees potential in charging for access to its increasingly larger AI models.