AI "Ice and Fire", can Meta turn the tide?

At the beginning of Wednesday's US stock market, there was a clear differentiation in the technology sector: Microsoft fell more than 2% due to the slowdown in cloud business growth in the second quarter, while chip giant AMD's second-quarter performance exceeded expectations, with its stock price rising by over 10%. Nvidia rose by over 9%, while chip companies such as TSMC, Micron, and Qualcomm all saw significant increases.

Behind the divergence in stock prices reflects the extreme situation of the AI industry, with "burning money" downstream companies like Microsoft struggling with growth, while upstream chip sellers like Nvidia are reaping profits.

The tech stock earnings season is in full swing, with AI spending becoming the top focus of the market. Investors are still trying to determine how long tech companies will take to see returns on AI investments. Meta's second-quarter report released after the US stock market on Wednesday will provide investors with more clues.

According to Citigroup's previous forecast, benefiting from AI drive, Q2 Meta may achieve strong revenue and profit growth, with capital expenditures increasing by 43.3% to $9.6 billion, slightly higher than the market's general expectation of $9.4 billion.

AI Remains an Investment Focus

"AI remains a key focus for Meta, as the battle of large models is just beginning," said Mike Proulx, Vice President and Research Director of Forrester, before the financial report was released. "It is expected that terms like 'metaverse' or 'horizon world' will rarely or even not appear in the earnings conference call."

According to Citigroup's previous research report, driven by AI, Threads and Facebook's user numbers grew in the second quarter. As of May, Facebook had over 40 million users aged 18-29 in the US and Canada, reaching the highest point in three years. At the same time, Threads' monthly active users in May also reached 175 million, an increase of 25 million compared to the previous month. The increase in user numbers often attracts advertisers better, ultimately leading to revenue growth for Meta.

In the second quarter, Meta released Llama 3.1, with the number of parameters increasing significantly to 405 billion, far exceeding the previous generation's 70 billion. Citigroup stated that after integrating Llama 3.1 into its business, Meta will gain better AI capabilities, helping to attract more users and advertisers.

Meta CEO Mark Zuckerberg recently admitted that they may have spent too much on AI infrastructure, but also emphasized that the risk of underinvestment is far greater than the risk of overinvestment

Meta is expected to show strong growth in the second quarter, with rapid expansion of its advertising business

According to analysts compiled by the media, Meta's revenue in the second quarter is expected to be $38.3 billion, a year-on-year increase of 20.1%; earnings per share are $4.74, a year-on-year increase of 59.1%.

Compared to the market, Citigroup is more optimistic, predicting that Meta's total revenue in the second quarter will reach $38.5 billion.

According to market consensus, Meta's app series revenue in the second quarter (including Facebook, Instagram, WhatsApp, and Messenger) is expected to reach $37.7 billion, a year-on-year increase of 18.9%. Like Google, Meta may benefit from advertising related to this year's U.S. election and the Olympics.

Proulx stated:

Meta's profit performance in the second quarter is strong. With expanding market share, Meta's short video app Reels is expected to continue to grow. Although Threads has proven it can compete positively with X, whether it can be profitable effectively remains a question.

Jefferies analyst Brent Thill also gave an equally optimistic outlook for Meta, writing in an investor report:

Most analysts we interviewed indicated that Meta's advertising budget situation is good, with spending growing "strongly," but some are beginning to see the impact of stricter comparisons."

As for Meta's Reality Labs division, analysts expect the business to achieve revenue of $376 million in the second quarter, higher than the $276 million in the same period last year. However, Reality Labs' cash is still continuously draining