Facebook parent Meta beats expectations with strong Q2 revenue

Meta Q2 earnings: Meta Platforms surpassed market expectations for second-quarter revenue on Wednesday and offered an optimistic sales forecast for the third quarter, indicating that robust digital-ad spending on its social media platforms can offset the costs of its artificial intelligence investments.

Following the announcement, the company’s shares rose by 6.8 per cent in after-hours trading.

The parent company of Facebook and Instagram projected third-quarter revenue between $38.5 billion and $41 billion, with the midpoint exceeding analysts' estimates of $39.1 billion, according to LSEG data.

For the April to June period, Meta reported a revenue increase of 22 per cent to $39.1 billion, surpassing analysts' expectations of $38.3 billion.

Meta Chief Financial Officer Susan Li stated on a call with analysts that the company continued to experience strong global advertising demand. She attributed this success to a multiyear project aimed at using artificial intelligence to improving targeting, ranking, and delivery systems for digital ads on its platforms.

Both Li and Chief Executive Mark Zuckerberg noted that these AI tools would drive growth over the next two years, while newer generative AI features, such as chat assistants, would take longer to monetise.

In response to Meta's report, shares of Snap (SNAP.N), another social media company heavily reliant on digital advertising, rose by 3 per cent.

"Any apprehensions investors may have had about Meta's spending on AI and the metaverse are likely to be allayed by this quarter's results," said eMarketer analyst Max Willens. He added that Meta's healthy margins should reassure investors about the company’s substantial investments in future plans.

Despite a 7 per cent rise in costs for the second quarter, Meta’s revenue growth significantly outpaced the increase in expenses, resulting in a 9-point rise in operating margin, from 29 per cent to 38 per cent.

Family daily active people (DAP), a metric tracking unique daily users of any Meta app, increased by 7 per cent year-over-year to an average of 3.27 billion for June.

Meta's earnings report followed disappointing results from other tech giants, which indicated that returns from significant AI investments might take longer than Wall Street had anticipated.

Microsoft (MSFT.O) announced on Tuesday plans to increase spending on AI infrastructure this fiscal year, while Google parent Alphabet (GOOGL.O) recently warned of elevated capital spending for the rest of the year.

Like Microsoft and Alphabet, Meta has invested billions in data centers to capitalise on the generative AI boom. However, its shares fell in April after disclosing a higher-than-expected expense forecast, briefly reducing its stock-market value by $200 billion.

This decline interrupted a series of strong quarters for Meta, which has recovered from a share price drop in 2022 by reducing its workforce and leveraging investor interest in generative AI technologies.

Debra Aho Williamson, founder of research firm Sonata Insights, described Meta's results as a "bellwether" for AI stocks. She explained that strong core business results make AI investments appear more positive, whereas weakness in core business, as seen recently with Alphabet’s YouTube, increases perceived risk.

Meta has increased hiring, particularly of AI engineers, while quietly reducing other teams. Despite a 1 per cent year-over-year decrease in workforce, Li expects headcount to be "meaningfully higher" by year’s end.

The company also plans to continue significant spending on AI infrastructure, projecting 2024 capital expenditure between $37 billion and $40 billion, an increase from the previous forecast of $35 billion to $40 billion.

Meta’s total expense forecast for the year remains unchanged at $96 billion to $99 billion, but the company cautioned that infrastructure costs will be a major driver of expense growth in 2025.

Losses from Meta’s metaverse unit, Reality Labs, which produces virtual reality headsets and smart glasses in partnership with EssilorLuxottica’s Ray-Ban, are expected to "increase meaningfully." Despite the success of the latest smart glasses, Reality Labs reported nearly $4.5 billion in losses for the second quarter, with revenue growth primarily driven by sales of Quest virtual-reality headsets.

(With Reuters inputs)