Meta Platforms Earnings Preview: All Eyes on Robust Ad Revenue and AI Advancements

Analysts are anticipating a robust quarter for the tech giant, with consensus estimates predicting revenues to reach $36.16 billion, marking a year-over-year increase of 26%. Earnings per share (EPS) are projected to soar by an impressive 95.99% to $4.31, as of Apr. 18th.

The spotlight for the first-quarter performance will shine on Meta's advertising business and its burgeoning AI segment. With the majority of the company's revenue tied to advertising, the unexpected strength of the U.S. economy, coupled with the upcoming U.S. Presidential elections and the Olympics, could lead to generous ad spending. Based on Bloomberg's consensus, advertising revenues are expected to reach $35.557 billion, a 26.53% increase year-over-year.

In addition to its advertising prowess, Meta boasts world-class AI operations.

On Thursday, Meta Platforms Inc.'s stock experienced a 1.5% increase after the tech giant revealed its new large language model, Llama 3, aimed at competing with OpenAI. The advanced model is now part of Meta's AI assistant and will feature prominently within its major applications such as Facebook, Instagram, WhatsApp, and Messenger, in addition to having a standalone website.

Meta's ongoing investments in AI are expected to diversely impact its revenue streams. Beyond aiding advertisers in content creation and promotion, AI can enhance chat functionalities across its social media platforms and potentially integrate with the company's augmented reality (AR) and virtual reality (VR) offerings to create new revenue avenues in the long term.

Despite these advancements, the company's guidance maintains that GenAI products will not be a significant revenue driver this year but rather see the potential for long-term impact.

Investment firms like Jefferies have raised their price targets for Meta from $550 to $585, maintaining a 'buy' rating. The analysis suggests that by 2024, Meta could capture 50% of the industry's incremental ad revenue, a historic peak well above the 33% forecast for 2023.

Citigroup also favors Meta, increasing its target price from $525 to $590 and reiterating a 'buy' rating, buoyed by strong growth indicators in Instagram Reels ad loads.

Bank of America's Justin Post pointed out that there could be "some sentiment risk" due to an expected year-over-year deceleration in Meta Platforms' second-quarter revenue guidance. He attributes this to the first quarter receiving a boost from "favorable January comps, the Leap Year, Easter, and forex effects."

Despite this potential downturn, Post remains upbeat on Meta's prospects. "We remain positive on Meta and reiterate our thesis that Reels, Messaging, and AI-driven ad improvements are still early, and could lead to positive product surprises & revenue momentum in 2024," he affirmed.

Post further emphasized the strength of Meta's investments in artificial intelligence. "Moreover, with a large capex budget, internal AI supercomputer, in-house LLM, and custom AI chips, we think Meta's AI assets are underappreciated in the stock price with stock at 16x core '25 EPS." This suggests that, in his view, the current stock price does not fully reflect the value of Meta's AI resources and future earnings potential.

Historically, Meta's stock performance on earnings days has been volatile, with an average price move of ±12.9% over the past 12 quarters, according to Market Chameleon. The latest implied move based on option market bets is ±9.1%, suggesting that traders expect a 9.1% swing in share price post-earnings. This is slightly below the average post-earnings stock price move of ±10.6% over the previous four quarters, indicating that options might be undervalued.

As the earnings release approaches, Meta's stock shows a modest bullish skew in volatility, reflecting the market's optimistic sentiment.