Meta’s Stock Dips Despite $36.5B Revenue, Eyes AI Growth

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Meta reported adjusted earnings of $4.71 per share, surpassing expectations and showing a strong year-over-year increase. First-quarter revenue rose by 27% to $36.5 billion, driven largely by a similar increase in advertising revenue. Meta is investing heavily in AI, including developing proprietary AI chips and positioning itself against competitors like Microsoft and Google.

Social media giant Meta Platforms (NASDAQ: META) has experienced an extraordinary rise, with its stock value increasing by approximately 490% in less than two years. However, following the release of its first-quarter results, Meta witnessed a steep drop in its market capitalisation, losing about $200 billion. This marked the most significant decline since 2022. The aftermath saw a flurry of downgraded target prices from Wall Street analysts. This prompts a critical question for investors: in the wake of such volatility, is it time to buy or sell Meta shares?

Meta’s Revenue Jumps 27%, Ad Sales Rise to $35.64B

Despite the dramatic drop, Meta’s first-quarter financial results tell a story of underlying strength and potential. The company reported adjusted earnings of $4.71 per share, surpassing the consensus estimate of $4.32 per share and significantly up from $2.20 per share year-over-year. Revenue also increased robustly, jumping 27% to $36.5 billion, in line with consensus estimates. This increase was primarily driven by a 27% rise in advertising revenue. It constitutes 98% of Meta’s total revenue, amounting to $35.64 billion.

However, not all was rosy; the Reality Labs division, Meta’s ambitious bet on the Metaverse, continued to incur losses, totalling $3.85 billion for the quarter. The stock’s decline was further fuelled by disappointing future revenue guidance and higher-than-expected forecasts for capital expenditures (CAPEX). Meta projected revenues between $36.5 billion and $39 billion for the upcoming quarter, slightly below the consensus estimate. CAPEX is also expected to increase, with projections rising to between $35 billion and $40 billion.

$3.85B Loss for Meta’s Reality Labs Amid AI Investments

During the earnings call, CEO Mark Zuckerberg highlighted Meta’s strategic shift towards bolstering its AI infrastructure, including a significant investment in developing proprietary AI chips. This move is set to decrease Meta’s reliance on external chipmakers like Nvidia (NASDAQ: NVDA). The introduction of MetaAI and its new AI assistant, Llama 3, positions the company to tap into new revenue streams and potentially dominate the emerging AI market, also challenging rivals like Microsoft’s ChatGPT and Google’s Gemini.

Competitors like Alphabet (NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT) have also ramped up their AI investments. Hence, Meta’s stock took a hit post-earnings due to its capital-intensive strategy not reflecting immediate revenue or earnings growth. In contrast, Google and Microsoft have seen tangible benefits from their AI investments, particularly in their cloud businesses. Yet, despite the current lack of visible financial returns, Meta’s ongoing heavy investments in AI underscore a long-term vision that may well redefine the company’s trajectory.

Meta’s P/E at 23.5x, Below Industry Despite $200B Stock Drop

The current market conditions and Meta’s strategic direction present an intriguing dichotomy. The recent sharp decline could signal caution as a red flag. However, it might be a compelling entry point for those with a long-term perspective. Meta’s valuation looks attractive, trading at a P/E ratio of 23.5x, which is notably lower than its industry peers. The fundamentals are strong, supported by robust free cash flows and a new commitment to shareholder returns through dividends and buybacks.

Investors should consider Meta’s deep commitment to AI and the potential for significant cost reductions through self-manufactured chips. These factors could drive future profitability. With Wall Street showing a prevailing sentiment of strong buy, investors need to carefully consider both the risks and the growth potential of Meta’s strategy.

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