In the world of tech giants, expectations can be a double-edged sword. On one hand, high expectations reflect investor confidence and the anticipation of continued growth and innovation. On the other hand, failing to meet those lofty expectations can lead to harsh reactions, even when the underlying performance remains strong. This is precisely the situation Meta Platforms (META) finds itself in after reporting its first-quarter 2024 results.
The Numbers: Beating Expectations, but Not by Enough
On paper, Meta’s Q1 2024 performance appears impressive. The Facebook parent company reported earnings of $4.71 per share on sales of $36.46 billion for the March-ended quarter. These figures surpassed consensus expectations of $4.32 per share in earnings and $36.14 billion in sales, according to FactSet data. Compared to the same quarter last year, Meta’s sales jumped an impressive 27%, while earnings soared by a staggering 114%.
However, in the fast-paced world of tech, past performance is often overshadowed by future projections. And it’s here that Meta’s guidance appears to have fallen short of investors’ sky-high expectations.
The Guidance Conundrum: Slower Growth and Higher Costs
For the current quarter ending in June 2024, Meta provided revenue guidance in the range of $36.5 billion to $39 billion, with a midpoint of $37.75 billion. While this represents a projected 18% year-over-year growth, it fell short of analysts’ expectations of $38.25 billion, according to FactSet data. This projected growth rate is also slower than Meta’s previous three quarters, where revenue growth ranged from 23.2% to 27%.
But it’s not just the slower revenue growth that has investors concerned. Meta also raised its guidance for total expenses, citing the need for infrastructure investments to support its “AI road map.” The company now expects capital expenditures between $35 billion and $40 billion for the year, up from the previous range of $30 billion to $37 billion. Overall expenses for 2024 are projected to fall between $96 billion and $99 billion, an increase from the previous range of $94 billion to $99 billion.
These rising costs, coupled with the slower projected revenue growth, have raised concerns among analysts and investors alike. Brent Thill, an analyst at Jefferies, noted in a client note that “lighter than expected Q2 revenue guidance and increases in the total expense and capex guides could weigh on the stock.”
The AI Factor: Investing in the Future, but at What Cost?
One of the key drivers behind Meta’s increased spending is the company’s push to establish itself as a leader in the rapidly evolving field of generative artificial intelligence (AI). During the earnings call, CEO Mark Zuckerberg highlighted the recent updates to Meta’s AI chatbot and Llama large language model, calling the results “a key milestone in showing that we have the talent, data and ability to scale infrastructure to build the world’s leading AI models and services.”
Zuckerberg further emphasized the company’s commitment to investing “significantly more over the coming years to build even more advanced models and the largest scale AI services in the world.”
While this ambitious AI strategy could position Meta as a frontrunner in this transformative technology, it also comes with significant upfront costs. Investors seem to be grappling with the trade-off between short-term profitability and long-term positioning in the AI race.
The Market’s Reaction: A Harsh Verdict
Despite Meta’s solid Q1 performance and ambitious AI plans, the market’s reaction has been decidedly negative. In after-hours trading following the earnings release, Meta’s stock plunged by more than 16%, wiping out billions in market capitalization.
This harsh response underscores the weight of investor expectations and the market’s sensitivity to any potential hiccups or deviations from the anticipated trajectory. Even for a tech behemoth like Meta, the pressure to consistently outperform and exceed expectations remains relentless.
The Technical Picture: From Strength to Vulnerability
Prior to the earnings report, Meta’s stock had been a standout performer in 2024. With a gain of just under 40% year-to-date and an impressive 138% surge over the past 12 months, Meta trailed only Nvidia (NVDA) among the “Magnificent Seven” stocks that powered the stock market rally in 2023.
Meta’s technical ratings were equally impressive, boasting a perfect IBD Composite Rating of 99 and an IBD Relative Strength Rating of 96 out of 99. The stock’s inclusion on prestigious lists like the IBD 50, Big Cap 20, and Leaderboard highlighted its status as a leader in the market.
However, the post-earnings sell-off has undoubtedly dented Meta’s technical strength, at least in the short term. Whether the stock can regain its momentum or faces a more prolonged period of consolidation remains to be seen.
The Road Ahead: Balancing Innovation and Profitability
As Meta navigates the aftermath of its Q1 2024 earnings report, the company finds itself at a crossroads. On one side lies the allure of pioneering the next generation of AI technologies, positioning itself as a leader in this transformative field. On the other side is the pressure to maintain profitability and meet the ever-increasing expectations of investors and analysts.
Striking the right balance between these competing priorities will be crucial for Meta’s long-term success. While investing heavily in AI may be a strategic necessity, the company must also demonstrate its ability to translate these investments into tangible returns and sustainable growth.
Effective communication and transparency with investors will be key to managing expectations and fostering understanding of Meta’s long-term vision. By clearly articulating the rationale behind its AI investments and providing realistic projections, the company can help temper the market’s knee-jerk reactions and focus on the bigger picture.
Moreover, Meta must remain agile and adaptable, continuously evaluating its spending patterns and prioritizing the most promising AI initiatives. Maintaining a lean and efficient operation while pursuing transformative technologies will be a delicate balancing act, but one that could ultimately separate the true innovators from the also-rans.
As the dust settles from this earnings report, one thing is clear: Meta’s journey towards AI dominance has only just begun. Whether the company can navigate the treacherous waters of investor expectations and emerge as a true leader in this exciting new frontier remains to be seen. But one thing is certain – the world of tech is watching, and the stakes have never been higher.
