Meta Stock Faces Double Whammy: Earnings Beat but AI Costs Surge

Despite beating consensus expectations for both sales and earnings, Meta stock experienced a sharp decline late Wednesday. The company’s first-quarter results, while impressive, failed to meet the sky-high expectations set by investors. Here are the key points:

1. Earnings Beat: Meta reported earnings of $4.71 per share on sales of $36.46 billion for the March-ended quarter. Analysts had projected earnings of $4.32 per share on sales of $36.14 billion.
2. Sales Growth: Sales surged by 27% year over year, demonstrating Meta’s strong performance.
3. AI Investment: Meta’s ambition to lead in generative artificial intelligence has led to increased costs. The company raised its guidance for total expenses, citing necessary infrastructure investments to support its AI roadmap.
4. Stock Market Reaction: Despite these positive results, Meta’s stock slid by more than 16% in recent after-hours trading.
5. Q2 2024 Guidance: Meta’s projections for the current quarter fell short of expectations. The company expects sales between $36.5 billion and $39 billion, with a midpoint of $37.75 billion. This represents roughly 18% year-over-year revenue growth for Q2, compared to higher growth rates in previous quarters.
6. Rising Costs: Investors were caught off guard by Meta’s increased capital expenditures and overall expenses. The company now projects capital expenditures between $35 billion and $40 billion for the year, up from the previous range of $30 billion to $37 billion. Overall expenses are expected to fall between $96 billion and $99 billion.

Meta’s Q2 2024 Guidance: Sales Fall Short, Costs Rise

The recent negative response to Meta stock can be attributed to its Q2 2024 projections. Meta’s guidance indicates sales between $36.5 billion and $39 billion, with a midpoint of $37.75 billion. However, this falls below the $38.25 billion projected by analysts for the June-ending quarter.

While the midpoint represents approximately 18% year-over-year revenue growth for Meta’s second quarter, it pales in comparison to the robust sales growth observed in the three previous quarters (27%, 24.7%, and 23.2%). Analysts expected a slowdown due to tougher year-over-year comparisons.

Additionally, rising costs have caught investors off guard. Meta now estimates capital expenditures between $35 billion and $40 billion for the year, up from the prior range of $30 billion to $37 billion. Overall expenses are projected to fall between $96 billion and $99 billion, compared to the previous range of $94 billion to $99 billion.

Jefferies analyst Brent Thill noted that “lighter than expected Q2 revenue guidance and increases in total expenses and capex guides could weigh on the stock”. Meanwhile, CEO Mark Zuckerberg emphasized Meta’s ability to scale infrastructure for AI models and services, hinting at significant future investments.

Meta Stock: Technical Ratings

Before the earnings announcement, Meta experienced a slight decline, closing at 493.50 in Wednesday trading. However, its overall performance has been impressive, with gains of nearly 40% this year and a remarkable 138% over the past 12 months. Among the “Magnificent Seven” stocks that fueled the stock market rally in 2023, Meta stock closely followed Nvidia (NVDA) for top performance in 2024.

Let’s delve into the technical ratings:

1. IBD Composite Rating: Meta stock boasted a perfect IBD Composite Rating of 99, as reported by IBD Stock Checkup. This rating combines five proprietary metrics into a single score. Generally, the best growth stocks exhibit a Composite Rating of 90 or higher.
2. Relative Strength Rating (RS Rating): Meta’s RS Rating stood at 96 out of 99, indicating strong relative price performance compared to other stocks.

In addition, Meta stock is featured on several IBD stock lists, including Tech Leaders, IBD 50, Big Cap 20, and the prestigious IBD Leaderboard list.