Meta's second-quarter report and next-quarter guidance exceeded expectations, without increasing the annual capital expenditure limit, rising 5% after hours | Financial Report Insights

In the second quarter, Meta's revenue and profit were higher than expected, with no further increase in the upper limit of the annual capital expenditure range. The guidance for total annual spending was not revised upwards, and the midpoint of the revenue guidance for the third quarter exceeded market expectations, rising more than 5% after hours.

On Wednesday, July 31st, after the U.S. stock market closed, Meta, the "metaverse platform" and a social media and digital advertising giant heavily betting on AI, released its financial report for the second quarter of the 2024 fiscal year.

1) Key Financial Figures

Quarterly Revenue: Increased by 22% year-on-year to $39.07 billion, higher than the market's expected $38.34 billion.

Diluted EPS: Increased by 73% year-on-year to $5.16, higher than the market's expected $4.72.

Capital Expenditure: Including principal payments for financing leases, it was $8.47 billion, lower than the market's expected $9.5 billion, with a 26% increase from the previous quarter.

Total Costs and Expenses: Increased by 7% year-on-year to $24.22 billion, including $1.4 billion in settlement costs related to charges in Texas, USA.

Operating Profit: Increased by 58% year-on-year to $14.85 billion, higher than the market's expected $14.59 billion. The operating profit margin increased from 29% in the same period last year to 38%.

2) Outlook

Third Quarter Revenue: Expected to be between $38.5 billion and $41 billion, with a midpoint of $39.75 billion, higher than the market's expected $39.16 billion.

2024 Annual Capital Expenditure: Expected to be between $37 billion and $40 billion, previously estimated at $35 billion to $40 billion.

2024 Annual Total Spending: Still expected to be between $96 billion and $99 billion, consistent with previous guidance, while analysts expected $97.73 billion.

3) Segment Data

Family of Applications: Revenue increased by 22% year-on-year to $38.72 billion, higher than the market's expected $37.76 billion; operating profit was $19.34 billion, higher than the expected $18.69 billion. The daily active people (DAP) of each application family increased by 7% year-on-year to 3.27 billion.

Core Advertising Revenue: Increased by 21.7% year-on-year to $38.33 billion, higher than the market's expected $37.57 billion, but weaker than the nearly 27% year-on-year growth in the first quarter, maintaining a share of about 98% of total revenue.

"Metaverse" Reality Lab: Increased by nearly 28% year-on-year to $3.53 billion, lower than the market's expected $3.71 billion. Operating loss was $4.49 billion, compared to a loss of $3.74 billion in the same period last year, with the market expecting a loss of $4.53 billion. The accumulated loss since the end of 2020 is approximately $50 billion.

4) Capital Return

Stock repurchases amounted to $6.32 billion for Class A common stock, with dividend payments of $1.27 billion

Cash and Cash Equivalents and Marketable Securities: As of June 30, 2024, it amounted to $58.08 billion, with free cash flow of $10.9 billion.

Due to Meta's second-quarter revenue and profit exceeding expectations, the upper limit of the annual capital expenditure range was not raised again, and the guidance for total spending for the year was not revised upwards. Moreover, the midpoint of the revenue guidance for the third quarter exceeded market expectations, leading to a post-market increase of over 5%.

Prior to the financial report release, Meta closed up 2.5% on Wednesday, following the collective rise of technology, chip, and AI stocks. This year, the stock has risen nearly 34%, significantly outperforming the S&P 500 index's increase of about 16% and the Nasdaq's increase of 17%.

Although Meta has fallen more than 12% from its historical high set on July 5, with the stock price falling to the level of May, Wall Street still maintains a consensus rating of "strong buy" for it. Among 27 analysts, 23 recommend "buy," while only 2 recommend "sell," with an average target price of $550, representing a potential upside of about 16%.

The recent decline in stock price has made Meta's valuation relatively low, with a P/E ratio of 20 times the expected EPS of $23.20 per share in 2025, far below the Nasdaq 100 index's 25 times. Morgan Stanley analyst Brian Nowak is bullish on the stock's performance after the financial report.

Meta's Revenue Has Grown by Over 20% Year-on-Year for Four Consecutive Quarters, Raising the Lower Limit of the Annual Capital Expenditure Range by $2 Billion

Some analysts believe that this is Meta's fourth consecutive quarter of total revenue growth exceeding 20% year-on-year, far exceeding the 11% growth in the same period last year, which was the quarter when the company first showed a significant rebound in revenue growth after the epidemic.

Although the total revenue growth in the second quarter was weaker than the 27% year-on-year growth in the first quarter, the total amount increased by 7% on a quarter-on-quarter basis, and the EPS was significantly higher than the $4.71 in the first quarter, demonstrating certain performance returns from AI investments.

The most closely watched indicator on Wall Street is the capital expenditure that includes AI investments. The market originally expected Meta's second-quarter capital expenditure to increase by about 50% year-on-year to $9.5 billion, bringing the full-year capital expenditure for 2024 to nearly $38 billion.

In late April, when the first-quarter report was released, Meta raised its capital expenditure for the year to $35 billion to $40 billion, potentially a 42% year-on-year increase. Wall Street was concerned that the huge investment had not yet yielded significant returns in revenue and profit growth, which caused the stock price to fall by 15% upon hearing the news of the financial report.

The latest second-quarter report shows that Meta has raised the lower end of the annual capital expenditure range by $2 billion, while the upper limit remains unchanged, to some extent alleviating investors' fears of uncontrolled growth in capital expenditure.

The company stated in its financial report that it continues to expect a "substantial year-on-year increase" in operating losses for Reality Lab in 2024, citing ongoing product development and further investment in expanding the ecosystem. Additionally, "infrastructure costs are expected to be a key driver of expenditure growth in 2025, with capital expenditures in 2025 also expected to increase significantly to support AI research and product development."

Meta CEO Mark Zuckerberg pointed out, "By the end of this year, Meta AI is expected to become the most widely used artificial intelligence assistant globally. We have released the first cutting-edge open-source AI model, and the Ray-Ban Meta AI glasses continue to attract widespread attention, with the family of applications also experiencing good growth."

Other highlights of the financial report include a 1% year-on-year decrease in the global workforce to 70,799 employees as of the end of June. Ad impressions and average ad prices for the Family of Apps, including Facebook, Instagram, WhatsApp, and Messenger, all grew by 10% year-on-year in the second quarter:

Furthermore, we will continue to monitor the active regulatory environment, including increasing legal and regulatory resistance in the EU and the US, which may have a significant impact on our business and financial performance.

Why is it important and what to watch for?

After leading the market throughout the year, large US tech stocks collectively weakened in July. Following the release of second-quarter earnings, shares of Google's parent company Alphabet, Tesla, and Microsoft all fell, with the market focusing on whether Meta can break this curse on tech stocks.

Given Meta's significant investment in the metaverse since 2022 and the past experience of being "punished" by investors on earnings days, concerns are rising over the lack of clarity on the company's high investment in AI and the return on investment for long-term growth.

Especially after Microsoft's lackluster cloud revenue growth in the second quarter and Alphabet's capital expenditures exceeding expectations, investors are more concerned about whether Meta will increase capital expenditures and how and when AI investments can translate into tangible drivers of revenue and profit growth. Chip investors are also watching whether Meta plans to continue investing heavily in AI.

Meta CEO Mark Zuckerberg recently stated that the company will invest heavily in its open-source AI platform Llama over the next five years. Meta is also a major customer of "AI darling" NVIDIA in data center accelerators and has purchased approximately 600,000 H100 GPUs Due to the high cost of training artificial intelligence models, Meta is looking for new revenue sources to maintain the open-source nature of Llama. Jefferies analysts believe Meta has three opportunities to monetize Llama: offering a "professional commercial version" with enhanced support and security features, allowing customers to personalize their models, develop applications, and train models from scratch with "custom AI services," and "increasing advertising revenue" by enhancing user interaction and engagement.

As Meta's core revenue still relies mainly on its traditional social media platforms, advertising sales strength is also a focus of attention. Last week, Google's parent company reported that search advertising revenue in the second quarter exceeded expectations, but YouTube's advertising sales were lower than expected.

Like Google, Meta, which ranks second in market share in the digital advertising field after Google, will also benefit from the surge in health advertising spending during this year's U.S. presidential election and the Paris Summer Olympics, with investments in AI also helping to improve advertising targeting and returns.

Channel surveys by mainstream brokerages such as Jefferies, Evercore ISI, and Wedbush all show a consistently strong advertising spending environment, especially with pleasing growth in advertising budgets allocated to Meta. New Street Research stated that Chinese advertising sales will drive growth in the second half of the year.

How is Wall Street viewing this?

Analyst Justin Post from Bank of America Securities believes that Meta may not raise its 2024 capital expenditure guidance again as it did in the first quarter, but operating expenses may face upward risks due to higher legal costs and non-cash factors.

News last week indicated that Meta is facing the threat of the largest antitrust fine in EU history. This week, Texas reached a $1.4 billion settlement with Meta to resolve allegations that it used biometric data without the consent of local residents.

Post mentioned that Meta's management has the opportunity to make a more constructive evaluation of the return on AI spending, and the underperformance of YouTube's advertising revenue may lower the bar. He still believes that short videos like Reels, Messaging, and AI-driven advertising improvements are in the early stages:

"Cost savings from Meta's augmented reality/virtual reality plans could 'significantly boost investor sentiment,' even if the saved funds are redirected to AI spending."

Mike Proulx, Vice President and Research Director at research and consulting firm Forrester, believes that Meta's short video solution Reels will continue to eat into TikTok's market share and maintain growth. The battle of large language models has just begun, and Meta's new social platform Threads has proven it can confront Musk's X (formerly Twitter) head-on, but the effectiveness of monetization remains a question.

In addition, many analysts are optimistic about Meta Llama's open-source nature. Jefferies believes that the open-source model will enable Meta to lead competitors in creating value and consolidating its AI leadership position, even comparing Meta's strategy to the success of Linux, implying that Llama could become a fundamental element of future AI software.

Ronald Josey from Citigroup also stated that the latest version of Meta's advanced model, Llama 3.1, released last week, has attracted over 25 partners, including tech giants like Amazon AWS, NVIDIA, Google Cloud, and Microsoft, providing Meta with growing customer service opportunities.

Melius Research pointed out that the latest version of Llama, a large language model, is "more responsible, commercially viable, and accessible than ever before," prompting all competitors to maintain significant investments to rapidly upgrade models and software stacks