Meta Q2 Earnings Preview: AI Advancements and Advertising Revenue Growth in Focus

● The Facebook and Instagram parent is expected to report revenue of $38.28 billion, about a 20% rise over the year-ago period.

● Earnings are projected to be $4.75 per share, a 59% jump from the year-ago quarter.

Meta's founder and CEO Mark Zuckerberg expressed optimism about the company's strong start to the year and said, "The new version of Meta AI with Llama 3 is another step towards building the world's leading AI. We're seeing healthy growth across our apps and we continue making steady progress building the metaverse as well."

Nonetheless, Meta’s Q1 2024 earnings report was met with market skepticism. Its share price dropped 16% in after-hours trading as investors fretted over Zuckerberg's plan to spend big on Meta's AI ambitions. Prior to the Q1 report, Meta had raced to a nearly 40% gain in 2024. While the Facebook parent's shares bounced back to reach a new high in early July, the stock pulled back in recent weeks.

Meta will report its second-quarter ad revenue with Citi analysts expecting the figure to grow 20.5% from the year-ago period to $37.95 billion, citing a strengthening ad environment, adoption of Instagram Reels, and new products for advertisers.

Most advertisers plan to spend more or maintain spending on Meta platforms, a survey conducted by Wedbush analysts found, which could contribute to strong second-quarter results and set the company on a positive trajectory for the second half of the year. The tech giant earlier this year expanded the AI tools it offers to advertisers.

Meta this month unveiled its Llama 3.1 open-source AI model. J.P. Morgan analysts said the launch could make Meta AI "the most used AI assistant by year-end, if not sooner."

Meta says that Llama 3.1 is as clever and useful as the best commercial offerings from companies like OpenAI, Google, and Anthropic. In certain benchmarks that measure progress in AI, Meta says the model is the smartest AI on Earth.

“It’s very exciting,” says Percy Liang, an associate professor at Stanford University who tracks open source AI. If developers find the new model to be just as capable as the industry’s leading ones, including OpenAI’s GPT-4o, Liang says, it could see many move over to Meta’s offering. “It will be interesting to see how the usage shifts,” he says.

Meta revealed that its CapEx is expected to be between $35 billion and $40 billion this year, up from the previous range of $30 billion to $37 billion. This increase is due to investments in infrastructure to support their AI initiatives, including the open-source large language model Llama. The high spending surprised investors and made Meta the biggest spender on AI hardware among Big Tech companies.

During the Q1 earnings call, the stock took a hit when CEO Mark Zuckerberg talked about his long-term focus on the Metaverse and investments in augmented reality (AR) glasses, like the Ray-Ban Meta glasses. This renewed emphasis on non-ad-related projects further unsettled investors.

CFO Susan Li mentioned that although the company doesn’t provide guidance beyond 2024, capital expenditures will continue to rise next year due to ongoing aggressive investments. “This could be risky. If Meta reports further increases in CapEx guidance, it might rekindle investor skepticism, at least in the short term,” said Bernard Zambonin, an equity research analyst for DM Martins Research and contributes to TipRanks.

Analysts with Jefferies reiterated a buy rating and set a price target of 565, up from 540, for Meta stock in a client note late Monday. That followed a report earlier in the day from Bernstein, whose analysts kept a positive outperform call on Meta and upped their price target to 575, from 565.

Citing checks with industry sources, Jefferies analysts believe Meta can beat expectations with its Q2 results and guidance for the September-ending third quarter.

"We continue to be encouraged by Meta's ability to sustain double-digit revenue growth," Thill said. He cited "the combination of higher engagement from AI investments, increased advertiser efficiency and ramping of incremental monetization formats."

Bernstein analyst Mark Shmulik wrote, “Compared to the moderated expectations of investors (midteens growth) Meta could beat on the guide,” He cited momentum for products such as the video-focused Reels, Click-to-Message ads and Meta's AI-powered advertising platform Advantage+.

Source: Investopedia, Investor’s Business Daily, TipRanks