Meta Shares Fall Due to Rising Costs and Uncertain AI Future

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Key Takeaways

  • Meta reported strong Q1 earnings with $36.46 billion revenue and $12.37 billion net income, but shares dropped 14% due to concerns over rising expenses and weak future revenue projections.
  • The company increased its annual expense forecast, investing heavily in AI and infrastructure to compete with tech giants like Microsoft and Google.
  • Amid intense AI competition, Meta is considering new revenue strategies, including charging for AI resources, to diversify beyond its traditional advertising model.

Meta’s strong quarter results did not prevent the company’s shares from plunging. What’s the reason behind investors’ dissatisfaction?

Meta Platforms Inc. reported strong first-quarter earnings on April 24, driven by a significant increase in advertising revenue.

However, the company’s shares took a 14% hit in after-hours trading due to higher-than-expected expenses and weak revenue guidance for the second quarter.

Facebook shares on premarket | Source: Google Finance
Facebook shares on premarket | Source: Google Finance

Why Did Meta Shares Fell?

The social media giant posted revenue of $36.46 billion, a 27% increase from the same quarter last year, and earnings per share of $4.71. It beats analysts’ estimates of $4.32. Net income also doubled to $12.37 billion, driven by an increase in advertising revenue to $35.64 billion.

Despite the strong earnings, Meta’s shares fell in after-hours trading due to increased expenses and lower revenue guidance concerns.

The company raised its expenses forecast for the full year, citing increased investments in artificial intelligence (AI) and infrastructure. Capital expenditures are now expected to be between $35-40 billion, up from previous guidance of $30-37 billion.

Meta’s Reality Labs division, which includes its virtual reality and augmented reality efforts, posted revenue of $440 million, but losses widened to $3.85 billion.

Although Facebook’s parent can raise its shoulders high over improved revenue earnings in Q1, there are still concerns about its stock performance. The company’s share price has been volatile in recent months, driven by fears of regulatory scrutiny, competition, and the impact of AI on its business.

Meta Wins in Ads Revenue, Faces AI Competition

Meta’s first-quarter earnings report comes as the company faces intense competition in the AI space from Microsoft and Google.

Microsoft, in particular, has been making significant strides in AI research and development with its Azure OpenAI service and its $10 billion investment in OpenAI, the company behind ChatGPT. Meanwhile, Google has been touting its AI advancements, including its PaLM 2 and Med-PaLM models.

Both Google and Microsoft have established cloud infrastructure businesses that generate significant revenue, which they can use to offset the costs of developing and deploying AI technology. In contrast, Meta does not have a cloud business and must rely on its traditional advertising model to generate revenue.

However, during yesterday’s earnings call, Mark Zuckerberg hinted that Meta may explore alternative revenue streams to monetize its AI technology, such as charging for “compute” resources. This could provide a new avenue for generating revenue in addition to its traditional advertising business.

As Meta continues to invest heavily in AI research and development, it will be interesting to watch how it chooses to monetize its AI technology and whether it can find success with a business model different from that of its competitors.