Meta Earnings: Navigating Ad Spending, AI Costs, and Market Expectations

As Meta Platforms (NASDAQ:META) prepares to release its quarterly earnings report, the tech industry and investors alike are keenly focused on the implications for ad spending, artificial intelligence (AI) investments, and overall market performance. This week is particularly crucial as both Meta and Amazon (NASDAQ:AMZN) are set to unveil their financial results, providing a clearer picture of the tech sector’s health. RBC Capital Markets internet analyst Brad Erickson offers insights into what we can expect from Meta’s earnings, highlighting the critical areas of concern and optimism among investors.

Erickson believes that despite the broader macroeconomic challenges, Meta’s fundamental results will remain robust. He emphasizes that the key to understanding Meta’s future lies in how CEO Mark Zuckerberg addresses capital expenditures (capex), the metaverse, AI, and return on investment (ROI). While it is challenging to predict Zuckerberg’s tone and outlook, Erickson remains optimistic about Meta’s guidance and overall performance. Investors are particularly interested in how Meta plans to navigate the evolving landscape of digital advertising, especially given the concerns about ad spending on its platforms.

Meta’s stock has shown impressive gains this year, with a 28% increase year-to-date (YTD), outpacing the S&P500 index, which has risen by 14%. This growth trajectory is further underscored by Meta’s peer Google (NASDAQ:GOOG), which is up 20% YTD. Market analysts are optimistic that Meta’s revenues and earnings will exceed consensus estimates for the fiscal Q2 2024 results. In the last quarter, Meta surpassed expectations with a 27% year-over-year (Y-o-Y) revenue increase, reaching $36.5 billion. Key metrics such as family daily active people, ad impressions, and average price per ad also showed significant improvement, setting a positive precedent for the upcoming earnings report.

According to Trefis analysis, Meta’s Q2 2024 adjusted earnings per share (EPS) is expected to be $4.75, slightly above the consensus estimate of $4.72. This follows a strong fiscal year 2023, where Meta’s net income grew by 69%, reaching $39.1 billion due to revenue growth and lower expenses. The positive momentum continued into Q1 2024, resulting in an operating margin of 38%. Analysts anticipate that this trend will persist in the second quarter, driving Meta’s annual GAAP EPS to around $20.05 for FY2024. Based on Meta’s valuation, this translates into a price of $509 per share, which is 12% higher than the current market price of approximately $453.

While Meta’s stock has experienced a decline recently, falling 14% from its record high earlier this month, analysts remain positive about its advertising sales. However, there is growing scrutiny over the costs associated with Meta’s ambitious AI projects. CEO Mark Zuckerberg has indicated that the company could spend up to $40 billion on capital expenditures, a figure that has raised eyebrows among investors. Analysts will be closely monitoring any updates on these spending plans during the earnings report, as they could significantly impact Meta’s financial outlook.

Despite the concerns over AI costs, some analysts expect Meta to deliver a modest beat in the second quarter. The company’s stock holds an IBD Composite Rating of 87 out of 99, although shares have fallen below a cup-with-handle buy point. Additionally, Meta’s relative strength line has declined in recent weeks, reflecting the broader market sentiment towards mega-cap technology stocks. Nevertheless, the anticipated 19.6% increase in sales for the June-ended quarter and a 57% rise in earnings to $4.71 per share indicate strong underlying performance.

Dominic Rizzo, a portfolio manager at T. Rowe Price, offers a nuanced perspective on the upcoming tech earnings season. With over 20 years of experience in managing investments, particularly in the technology sector, Rizzo predicts that tech companies will continue to report strong earnings, albeit with some variation within the sector. He believes that sub-sectors such as software and cloud computing will outperform others, driven by the accelerated shift to digital during the pandemic. Rizzo anticipates positive results from tech giants like Facebook, Amazon, Apple, and Alphabet, but he also warns of potential regulatory scrutiny and antitrust actions that could pose risks in the future.

Rizzo highlights the impact of the recent rotation towards value stocks and away from growth stocks, which may affect tech earnings in the long term. Despite this shift, he remains confident in the strong balance sheets and growth potential of tech companies. He advises investors to consider both short and long-term trends when evaluating tech earnings, emphasizing the importance of looking beyond just quarterly results to understand the overall trajectory of a company’s growth. This holistic approach is crucial for making informed investment decisions in a volatile market environment.

The ongoing trade tensions between the US and China also add a layer of complexity to the tech earnings outlook. Rizzo suggests that investors should maintain a diversified portfolio to mitigate risks associated with geopolitical uncertainties. He cautions against investing all funds in one sector, particularly given the high valuations of some tech companies. The risk of a market correction remains ever-present, and investors must exercise caution and diligence in their investment strategies.

On the topic of inflation and rising interest rates, Rizzo argues that tech companies are well-positioned to withstand these challenges. Many tech firms have lower debt levels and better cash flow compared to other sectors, making them more resilient to market fluctuations. Additionally, the potential for mergers and acquisitions within the tech sector could provide further growth opportunities and impact earnings positively in the near future. Investors should keep an eye on these developments as they evaluate the tech landscape.

Rizzo concludes by reiterating the strong growth potential of tech companies, encouraging investors to remain vigilant in their research and decision-making processes. While the tech sector continues to thrive, it is essential to carefully consider the risks and opportunities within the industry. The upcoming earnings reports from Meta and other tech giants will provide valuable insights into the sector’s performance and future prospects, helping investors navigate the complex and dynamic market environment.

In summary, Meta’s upcoming earnings report is set to be a pivotal moment for the company and the broader tech industry. With strong fundamentals, impressive growth metrics, and a strategic focus on AI and digital advertising, Meta is well-positioned to deliver solid results. However, the high costs associated with its AI ambitions and the broader macroeconomic challenges present significant risks that investors must carefully weigh. As the tech sector continues to evolve, staying informed and making data-driven investment decisions will be crucial for navigating the complexities of the market.