Facebook parent Meta's Q1 performance overshadowed by weak revenue, increased expense outlook; stock plummets

Despite posting better-than-expected numbers in the first quarter of 2024, Facebookparent Meta’s forecast of weak revenue and increased expenses caused the company’s stock to plummet about 16% during after-hours trading on Wednesday.

The company anticipates second-quarter revenue to range between $36.5 billion and $39 billion. In the same period last year, revenue stood at $32 billion. A midpoint of the forecast, $37.75 billion, would signify an 18% year-over-year growth.

Meta’s revenue in the quarter ending March 31, 2023, rose 27.3% to $36.5 billion, from $28.6 billion in the corresponding quarter last year. Its net profit surged 116.6% to $12.4 billion (or $4.71 per share) from $5.7 billion (or $2.20 per share) in the same period last year.

“It’s been a good start to the year—both in terms of product momentum and business performance. We estimate that more than 3.2 billion people use at least one of our apps each day... We have also made good progress on our AI and metaverse efforts,” Mark Zuckerberg, Founder and CEO of Meta, said during the first-quarter earnings call.

Focus on AI

Since the start of last year, Meta has directed its efforts toward enhancing its business stability to realise its long-term vision for artificial intelligence (AI) and the metaverse.

AI has been a significant area of focus for the company, which has developed various AI services such as Meta AI, creator AIs, business AIs, as well as internal coding and development AIs.

Last week, Meta unveiled the latest iteration of its Meta AI, equipped with the advanced Llama 3 model. This AI assistant, available across Meta’s suite of apps—WhatsApp, Messenger, Instagram, and Facebook—enables users to pose inquiries on a wide array of topics.

“Our goal with Meta AI is to build the world’s leading AI service both in quality and usage,” Zuckerberg said.

He added that the company initiated the rollout of Meta AI in select English-speaking regions, with plans to expand its availability to additional languages and countries in the coming months.

“The initial rollout of Meta AI is going well. Tens of millions of people have already tried it. The feedback is very positive,” the Meta chief noted.

Zuckerberg believes that the company should invest significantly more over the coming years to build even more advanced models and “the largest scale AI services in the world.” 

But building the leading AI will also be a larger undertaking than the other experiences Meta has added to its apps, and this is likely going to take several years, he said, adding, “On the upside, once our new AI services reach scale, we have a strong track record of monetizing them effectively.”

AI is already helping Meta improve app engagement. Right now, about 30% of the posts on Facebook feeds are delivered by the company’s AI recommendation system, which is up 2x over the last couple of years, according to Zuckerberg. Meanwhile, more than 50% of the content people see on Instagram is now AI-recommended.

The company is scaling capex and energy expenses for AI, Zuckerberg noted, adding that it will continue focusing on operating the rest of the company efficiently.

Meta anticipates its full-year 2024 capital expenditures to be in the range of $35 billion to $40 billion, increased from its prior range of $30 billion to $37 billion as it continues to accelerate its infrastructure investments to support its AI roadmap, according to Meta CFO Susan Li.

Metaverse path

Apart from Meta’s endeavours in AI, another area of long-term focus is the metaverse—an immersive digital realm—where it has been making significant investments ever since 2021 when Facebook rebranded to Meta. 

Zuckerberg finds it interesting to see the convergence of these two themes—"this is clearest when you look at (smart) glasses.”

According to him, an increasing amount of the firm’s Reality Labs work is going towards serving its AI efforts.

Reality Labs, which works on virtual reality (VR) and augmented reality (AR) gadgets and Meta's metaverse vision, posted $440 million in revenue in Q1, up 30% driven by Quest headset sales. The unit’s operating loss stood at $3.8 billion.

“For Reality Labs, we continue to expect operating losses to increase meaningfully year-over-year due to our ongoing product development efforts and our investments to further scale our ecosystem,” Li noted.

Family of Apps 

Meta saw 26.8% growth in its advertising revenue—its main revenue source—which increased to $35.6 billion from $28.1 billion in the year-ago period. Total Family of Apps revenue touched $36 billion, which includes advertising revenue.

The California-based company has made significant strides since facing challenges such as reduced advertising demand, heightened competition from platforms like TikTok, and the impact of Apple’s iOS privacy adjustments on its revenue.

During Q1, Meta observed a 20% rise in the total number of ad impressions served across its services, alongside a 6% increase in the average price per ad, Li said.

She added that in Q1, Family of Apps expenses were $18.4 billion, accounting for approximately 81% of its overall expenses, with a 7% increase primarily attributed to higher legal and infrastructure costs, partially offset by reduced restructuring costs.

The social media giant ended the first quarter with 69,329 employees, down 10% from a year ago.

Zuckerberg noted that Meta will continue to “carefully manage headcount” and other expense growth throughout the company.

The company expects full-year 2024 total expenses to be in the range of $96 billion to $99 billion, updated from its prior outlook of $94 billion to $99 billion due to higher infrastructure and legal costs, Li explained.

Highlighting the quarter’s performance, Li said, “Q1 was a good start to the year. We're seeing strong momentum within our Family of Apps and are making important progress on our longer-term AI and Reality Labs initiatives that have the potential to transform the way people interact with our services over the coming years.”

Meta’s stock has surged approximately 40% this year as of the close of Wednesday’s trading session, following its nearly threefold increase last year.