It was a weird one for shareholders of Meta Platforms (NASDAQ:META). Despite beating first-quarter earnings estimates, shares of the stock plunged as much as 19% on market open on Thursday. So, let’s get into what happened and why investors weren’t thrilled with the results.
What happened?
First, we’ll discuss the good news. First-quarter revenue indeed was up 27% year over year, hitting US$36.46 billion. This narrowly beat estimates of US$36.22 billion, with even more growth for the company. Furthermore, costs only rose by 6%, with operating income surging to US$17.66 billion, a 57% increase over last year.
Despite this “good start to the year,” according to Chief Executive Officer (CEO) Mark Zuckerberg, this was marred with a warning by the head of the company. Zuckerberg provided a weak outlook for the second quarter and further noted that more spending would be coming as Meta stock expands into the areas of artificial intelligence (AI) and the metaverse.
This spending would likely be on infrastructure costs, with a forecast to increase capital expenditures between US$35 and US$40 billion in 2024 alone. This would all be in support of its AI roadmap, according to Zuckerberg.
Wall Street isn’t having it
Not only did investors drop their shares of Meta stock on the news of more spending, without the security of monetization, Wall Street also dropped the stock. It was clear that the company’s “Year of Efficiency” was over, and it was back to business as usual. And that “usual” is spending on innovation — innovation that may be unproven when it comes to creating cash flow.
Instead, the Meta CEO stated that costs would grow “meaningfully” in the coming years and that it could be years before the stock sees much revenue from its AI products.
Overall, a whopping 17 analysts downgraded the price target of Meta stock, with just eight raising their view. The median price now stands at US$525 as of writing, only slightly higher than today’s share price of US$426 as of writing.
Some positivity
Despite the news that more costs were coming, it’s important to note that other analysts believe this has long been part of Zuckerberg’s plan. AI-driven engagement on content could see a positivity from users. Further, the stock has taken these times with extra cash on the books to invest in innovation. And AI is a clear choice and potentially clear winner for Meta stock.
The investment overall comes from a position of strength, in the words of one analyst, with management continuing to see a “healthy ad demand” from user engagement.
So, while being on the offensive when it comes to investing is certainly a strong choice, especially during these tough times, Meta stock has long been an innovator. Therefore, some analysts see this as a strong move at the right time, giving the company time to see ad revenue come in from its AI investments.
How long will the investment cycle last? Only time will tell. And how much will that investment pay Meta stock back, if at all?
