Meta Platforms (META, Financial) CEO Mark Zuckerberg is steering the company away from the "year of efficiency" towards a period of heightened spending, reminiscent of the strategy that previously impacted the stock negatively in the second half of 2021 and throughout 2022. Despite META's impressive first-quarter performance, with earnings per share (EPS) and revenue soaring by 114% and 27% respectively, the announcement of a significant increase in FY24 capital expenditure (capex) guidance from $30-$37 billion to $35-$40 billion took investors by surprise.
The stock's 38% rally year-to-date before today's drop was built on expectations of strong results, driven by effective cost management, a booming advertising market, and AI-enhanced app engagement and advertising return on investment (ROI). These elements contributed to META's exceptional quarterly outcomes. However, Zuckerberg's previous hints at increased technology investments for AI development and the launch of Llama 3, a large language model, did not fully prepare investors for the scale of the spending increase.
Details of the financial adjustments include: - A $4 billion, or roughly 12%, increase in capex guidance based on the midpoint. - An upward revision of the FY24 total expense forecast's lower end to $96 billion from $94 billion, with the upper end unchanged at $99 billion.
Moreover, META plans to further boost capex next year to support its ambitious AI research and product development initiatives. Zuckerberg cautioned that these investments might take years to yield significant returns. Nonetheless, unlike its metaverse ventures, META's AI investments have already positively impacted its financials, enhancing app engagement and advertising metrics.
Challenges remain, as META's aggressive investment strategy and a slightly cautious Q2 revenue outlook have affected its stock performance and influenced the market, impacting shares of Snap (SNAP, Financial), Pinterest (PINS, Financial), and Alphabet (GOOG, Financial). With SNAP and GOOG set to report their Q1 earnings soon, and PINS following shortly, the industry is watching closely.
As META pivots towards bolstering its AI capabilities, the shift from a cost-focused approach to aggressive investment marks a strategic move aimed at securing a leadership position in AI. This decision, driven by the tangible benefits AI has provided, contrasts with the company's costly metaverse investments, signaling a potentially more promising direction for META's future.
