Meta beats on top & bottom lines but stock falls on AI priority
Meta Platforms reported its third quarter 2023 earnings after the close on Wednesday October 25, 2023.
At a glance:
Revenue: $34.15 billion vs $33.56 billion expected
Earnings per share: $4.39 vs $3.63 expected
Daily active users (DAUs): 2.09 billion vs 2.07 billion expected
Monthly active users (MAUs): 3.05 billion vs 3.05 billion expected
Average revenue per user (ARPU): $11.23 vs $11.05 expected
Source: Meta Q3 2023 earnings presentation
Total revenue was up 23% on a year-on-year basis, having rebounded from a tough 2022. Compared to Google's ad revenue which only increased 9.5%, while Snap reported revenue growth of 5%.
As Meta's year of efficiency continues, its operating margin reached an impressive 40%.
Free cash flow for the quarter was one of the best in the last 2 years.
AI in 2024 will be priority
CEO Mark Zuckerberg mentioned during the conference call that "In terms of investment priorities, AI will be our biggest investment area in 2024 both in engineering and compute resources, but I want to avoid allocating a lot of new headcount. So we're going to continue de-prioritizing a number of non-AI projects across the company to shift people toward working on AI instead."
Impact on ad spend in the Middle East
During the conference call, Susan Li, Meta's finance chief mentioned that the company widened its revenue guidance range for the fourth quarter because of the unpredictability in the Middle East due to the Israel-Hamas war.
"We have observed softer ads in the beginning of the fourth quarter, correlating with the start of the conflict, which is captured in our Q4 revenue outlook," Li mentioned on the call, adding that "It's hard for us to attribute demand softness directly to any specific geopolitical event."
Expected revenue for the fourth quarter is in the range of $36.5 billion to $40 billion, while analysts were expecting $38.85 billion.
Capex Outlook
Susan Li also updated on 2023 capital expenditure to be in the range of $27 billion to $29 billion, updated from prior estimate of $27 billion to $30 billion. As for full year 2024 capex, Meta expects it to be in the range of $30 billion to $35 billion, with growth driven by investments in servers, including both non-AI and AI hardware, and in data centers as Meta rampS up construction on sites with new data center architecture announced late last year.
Final thoughts
As there is some disjoint between Meta's rebound in revenue and profits and spending in AI ventures for 2024, the market has reacted negatively following the conference call. Initially, the price action rose 4% during post market on revenue and earnings beat, but thereafter the stock was down 3% by the end of post market.
Given the dip will continue, I will be looking at the following support as it's currently undervalued.
Fair value from Morningstar $322
Support 1 $277
Support 2 $260
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