Meta's Earnings Surpass Expectations; AI Capital Expenditure Set to Rise

Meta Platforms Inc., the parent company of Facebook, reported its earnings after the market closed on Wednesday.

Revenue for the third quarter reached $40.59 billion, marking a 19% increase from the previous year and exceeding analysts' projections of $40.26 billion. Meta anticipates fourth-quarter revenue between $45 billion and $48 billion, compared to the earlier analyst estimate of $46.1 billion.

Net income climbed 35% to $15.7 billion, with earnings per share at $6.03, surpassing the forecasted $5.25 per share.

The company recorded an average of 3.29 billion daily active users across its family of apps in the September quarter, slightly below the projected 3.31 billion, yet up 5% from the prior year.

Meta Platforms Inc.'s Reality Labs division, tasked with advancing the metaverse and AI, reported widening losses despite a 29% year-over-year revenue increase to $270 million. Operating losses ballooned to $4.4 billion.

The division's revenue is largely driven by sales of Meta's Quest VR headsets and Ray-Ban Meta smart glasses. At its recent Meta Connect conference, the company showcased a prototype of the Orion augmented reality glasses. Still in early development, these glasses aim to enable holographic communication.

Chief Financial Officer Susan Li said, "We anticipate that 2024 operating losses for Reality Labs will grow significantly compared to this year as we continue to invest in product development and ecosystem expansion."

AI and hardware advancements require hefty investments. Third-quarter capital expenditures surged 36% to $9.202 billion. Meta has adjusted its 2024 capital expenditure forecast's lower limit to $38 billion, up from $37 billion, while keeping the upper limit steady at $40 billion.

"We still foresee a substantial increase in capital expenditures for 2025. In light of this and the back-end heavy nature of our 2024 capital expenditures, we expect a significant rise in infrastructure expense growth next year as we account for higher depreciation and operating costs of our expanded infrastructure fleet," Suan Li stated during the earnings call.

"The strategy for building out our infrastructure might not align with investors' short-term expectations, as we're expanding," Zuckerberg remarked on Wednesday. "However, I believe the opportunities here are vast. We will continue to invest heavily in this area, and I am proud of our teams who are doing remarkable work to establish a large capacity to deliver top-tier models and products."

Following the earnings release, major Wall Street banks—Bank of America, JPMorgan, UBS, Citi, and Barclays—have increased their price targets for the company.

Citigroup remains confident in Meta Platforms Inc.’s strategic focus on short-, medium-, and long-term opportunities, despite anticipated increases in capital expenditures for 2025. The firm advises investors to view any mispricing of the stock as a buying opportunity. Reflecting these considerations, Citigroup reiterated its buy rating and raised its price target to $705 from $645.

JPMorgan analyst Doug Anmuth increased Meta Platforms' price target to $660 from $640, maintaining an Overweight rating. Shares dipped 3% after Q3 results as a robust Q4 revenue forecast was overshadowed by anticipated substantial growth in 2025 capital expenditures and infrastructure costs, Anmuth noted. The firm acknowledges Meta's shift from short-term earnings to long-term potential, citing significant AI-driven gains in its core advertising business and a promising product pipeline including Meta AI and Llama. Anmuth argues that Meta's strong core revenue growth and track record for execution "afford the company the right to spend big on AI."

Barclays analyst Ross Sandler increased Meta Platforms' price target to $630 from $550, maintaining an Overweight rating after its Q3 earnings. Meta "seems to have its mojo back," evidenced by growth well above the digital ad industry, artificial intelligence improving the business, and CEO Mark Zuckerberg "flexing the roadmap with a willingness to bet big," the analyst wrote in a research note. While these moves should be praised by long-term tech investors, Sandler warns of potential risks as Meta's valuation reaches new highs.