Meta Q3 Earnings Preview: Will the Growth Story Continue?

As Meta is set to release its Q3 2024 earnings on October 30, investors are watching for sustained growth and profitability amid rising expenses and high expectations in AI and Reality Labs.

Meta's CFO Susan Li projects that the company's revenue for Q3 2024 will range between $38.5 billion and $41.0 billion, representing year-over-year growth of 12-20%. Analysts' consensus stands at $40.30 billion. Meta has shown impressive performance this year, consistently exceeding expectations each quarter.

In its Q2 earnings call, Meta announced that one of its major platforms now has over 3.27 billion daily active users, with WhatsApp reaching over 100 million monthly active users in the U.S., showing solid growth in a key market.

Analysts expect these positive trends to continue into Q3, with forecasts suggesting that the company's "family daily active users" could reach 3.31 billion, highlighting sustained engagement across Meta's suite of apps.

In the long term, analysts foresee that Meta will inevitably reach a point of user growth saturation.

Meta's revenue is heavily anchored by advertising, which accounts for 98% of its total income. Thanks to advancements in AI, Meta's ad business has seen remarkable improvements in ad placement and personalized targeting, resulting in a projected 25% increase in advertising revenue year-over-year in Q3, driven by Facebook and Instagram.

Beyond its core advertising business, Meta is actively diversifying its revenue to counter slower ad growth and user saturation. Current diversification efforts focus on Reels, WhatsApp, and AI infrastructure monetization.

First, Reels has become a key growth driver, with high user engagement and a strong appeal among younger demographics. Meta is expanding ad inventory on Reels to boost monetization. As video content continues to take a larger share of social media engagement, Reels is well-positioned to drive incremental revenue in the coming years, gradually reducing Meta's reliance on traditional ads.

Second, With over a billion active users globally, WhatsApp's commercial potential is significant but still in the early stages. Meta is introducing paid features and a business API to serve SMBs and cross-border e-commerce clients. Analysts expect WhatsApp's monetization to unfold over the next 3-5 years, potentially becoming a distinct growth engine for Meta.

Last, Meta's AI ambitions go beyond ad revenue enhancements. CEO Mark Zuckerberg envisions Meta's AI assistant becoming the most widely used assistant globally by late 2024, underscoring Meta's drive for AI-based product and ad innovation. Revenue from these AI-based services and partnerships will further diversify Meta's income streams, strengthening its competitive position in the AI ecosystem.

Meta's spending plans for the third quarter are important. The company expects to spend between $37 billion and $40 billion this year, an increase from its earlier estimate of $35 billion to $40 billion for the second quarter. Analysts think Meta will likely reach the higher end of this spending range because the companyis investingheavily in AI to stay competitive with Microsoft.

At the same time, Meta's Q3 capital expenditures are expected to hit $9 billion, well above prior estimates of $7.5 billion. This increase is largely attributable to investment in AI infrastructure, data center expansion, and Reality Labs R&D.

Some analysts think that while Meta may still grow faster than other companies, it is experiencing slower revenue growth and increasing costs. Because of this, they are worried about whether Meta's stock price can keep going up, especially since it has already hit an all-time high.

Reality Labs, Meta's augmented and virtual reality division, continues to post significant losses, which could exceed $4.5 billion in Q3, hitting new highs. While AR projects in Reality Labs are promising in the long run, analystsneed tobe more cautious about its VR strategy due to tepid demand.

Recently, Meta discontinued production of its Quest 2 and Quest Pro headsets, signaling a shift in its hardware strategy. While the metaverse remains Meta's long-term vision, Reality Labs' near-term losses will likely continue to weigh on its profitability.