Meta stocks could pop if AI CapEx accelerates ad revenue

There’s something special about CEOs who start and run publicly traded companies. They have the creative spark, the drive and the determination to continue pursuing new growth opportunities.

They also have a special mentality – called Cognitive Hunger in my book Brainstorm – that can deliver the kind of exceeding expectations growth that pushes a company’s share price to new highs. Unfortunately, investors may pay a price in the short term if those bets don’t pay off.

This comes to mind when I consider the mixed third-quarter report from Meta Platforms — whose founder and CEO Mark Zuckerberg made such a big bet on what he called the metaverse — that he changed the company’s name from Facebook.

His willingness to make such bets caused Meta’s stock to fall more than 1% in pre-market trading on October 31.

Although Meta beat third-quarter earnings expectations, investors were unconvinced by the company’s assertion that “really big” opportunities warrant a “significant acceleration” in spending on AI investments by 2025, Zuckerberg told investors in a October 30 earnings call. Additionally, Meta’s user growth in the quarter fell short of expectations.

Despite these concerns, there are two reasons why this dip could present a buying opportunity:

• Advertiser adoption of Meta’s generative AI tools
• Meta’s greater spending discipline

Analysts see the potential for Meta stock to rise in the coming year.

Meta’s mixed third-quarter financial results

Meta’s financial performance was mixed in the last quarter. The good news was stronger-than-expected advertising revenue growth in the third quarter.

The not-so-good news was a slight shortfall in user growth – measured by the “number of users logging into at least one of its apps per day” – and “significant acceleration” in infrastructure spending by 2025, the company said. Associated press.

These are the most important figures:

• Turnover Q3 2024: $40.59 billion – up 19% and $380 million more than analyst consensus, according to FactSet research.
• Net income in the third quarter of 2024: $15.69 billion – 35% more than last year, noted AP.
• Earnings per share Q3 2024: $6.03 – up 37% from the previous year and 81 cents above Fact set estimation.
• Q3 2024 “family of daily active people:” 3.29 billion average for September – 20 million less than analyst consensus, AP reported.
• Fourth quarter 2024 revenue forecast: range between $45 billion and $48 billion – the midpoint of which exceeds analysts’ $46 billion forecast by $500 million Bloomberg

“We had a good quarter, thanks to advances in AI in our apps and operations,” Zuckerberg said in a statement. “We also have strong momentum with Meta AI, Llama adoption and AI-powered glasses.”

Adoption of Meta’s generative AI tools by advertisers

If user growth expectations are not met, Meta will be pressured to increase revenue per user. The company told investors that its AI tools increase advertising effectiveness.

“Missing the user metric, daily active people, is concerning because Meta will have to squeeze more revenue from its existing users as growth slows,” Emarketer analyst Jasmine Enberg told me. AP.

Meta could achieve this goal “because its AI-powered tools increase engagement by helping users show more of what they like and making the ads, especially on Reels, more effective,” she added.

Meta’s AI-powered feed and video recommendations help drive engagement. More specifically, these tools resulted in an 8% increase in time spent on Facebook and a 6% increase on Instagram, Zuckerberg told investors on the call.

Additionally, “more than a million advertisers used Meta’s generative AI tools to create more than 15 million ads in the past month,” he added. Additionally, companies “that use image generation see a 7% increase” in the number of users who make a purchase after viewing the ad, Zuckerberg said.

Finally, Meta’s Threads – a rival to Elon Musk’s “to make available”. in 43 countries and a dozen languages,” reported the Magazine.

These new services may provide Meta with the opportunity to increase advertising revenue.

Meta’s greater cost discipline

Meta has convinced some investors of the company’s ability to keep expenses under control.

Despite a 9% workforce increase to 72,000 over the past year, Zuckerberg has emphasized frequent layoffs at the company, aiming for continued “efficiency.” Fortune.

This has resulted in an increase in operating profit. As a result of operating expense growth of 13% in the third quarter – below revenue growth of 19% – Meta’s operating margin increased by three percentage points over the past year to 43%. Fortune reported.

One analyst was impressed with this effort. “They’ve really shown that they’ve achieved a level of cost discipline and AI is actually contributing to the bottom line,” Justin DuMouchelle, portfolio manager at New York-based Cerity Partners, told the Magazine.

Meta’s expensive bets on the Metaverse and AI

Meta has clearly shown its willingness to invest heavily in growth opportunities.

Zuckerberg’s bet on “the so-called metaverse, a virtual space where he expects people to work and spend time in the future,” according to the Journal, has resulted in $50 billion in losses. In the latest quarter, Meta’s Reality Labs unit – maker of the Quest headset and Ray-Ban Meta smart glasses – posted $4.4 billion in operating losses.

Meta has spent more than expected on capital expenditures – largely on AI. During the earnings call, the company raised its 2024 capital expenditure forecast by $1 billion to $38 billion – while keeping the top end at $40 billion.

Meta expects capital expenditures to increase “significantly” in 2025. These investments are justified by the potential returns. “I just think the opportunity here is very good,” Zuckerberg told investors. “I am proud of the teams who are doing a great job of utilizing a large amount of capacity so that we can deliver world-class models and world-class products,” he added.

One analyst had a mixed reaction. “Meta is firing on all cylinders and AI is clearly driving growth,” Jesse Cohen, senior analyst at Investing.com, told the New York Times. “That said, investors appear to be disappointed with the company’s share price performance and the rising costs required to develop AI capabilities.”

Investors see some upside for Meta stock. The average analyst price target of $613.13, according to Barrons represents an increase of 5%.

The stock could rise even more if AI can boost Meta’s ad revenue more than investors expect.