- Meta revenue and earnings both beat expectations comfortably
- Ad pricing shows signs of bottoming-out, but is overshadowed by warning revenue outlook for 2024 is “uncertain”
- Meta keep tight control of costs, but still ramping-up investment in new areas like AI, AR/VR headsets and the metaverse
- Pinning hope on AI to transform the business, but says it’s too early to discuss monetization
- Meta shares are down over 3% as investors focus on outlook over results
- Nasdaq 100 has sunk to a 4-month low
Meta Q3 earnings beat expectations
Revenue rose 23% from the year before to $34.15 billion, which came in ahead of the $33.51 billion forecast. Diluted EPS spiked to $4.39 from just $1.64 the year before, smashing the $3.60 pencilled-in by analysts.
Meta’s ad business improves
Engagement remained strong on its apps, aided by the popularity of Reels, and its advertising business showed strong signs of bottoming-out.
Ad prices on its platforms were down 6% in the quarter. While negative, that was a major improvement considering prices have declined at sharp double-digit percentages over the past 18 months. It was also a milder decline than the 8.9% drop anticipated by analysts, which are now more confident that ad prices will return to growth going forward.
Jefferies said Meta beat even the most optimistic of forecasts in the period and said engagement levels were “very impressive” across the board.
Meta warns of “uncertain” revenue outlook for 2024
Hopes that the worst of the challenges for Meta’s advertising business are behind it initially sent the stock higher in after-hours trading but then swiftly reversed course to trade down over 3% in after-hours trade after chief financial officer Susan Li warned progress is at the behest of uncertain macroeconomic conditions, adding that “the revenue outlook is uncertain” for 2024.
That is casting doubt over whether the welcome improvement we saw in the third quarter can continue. Its revenue guidance for the fourth quarter of $36.5 billion to $40 billion was within the $38.8 billion forecast by analysts, although that wider-than-usual range shows Meta is feeling more uncertain about the outlook.
Meta to up spending in 2024
Meta has described 2023 as a ‘year of efficiency’ that has seen it slash thousands of jobs and cut costs. That has seen it keep costs on a tight leash, with its operating margin doubling to 40% in the third quarter from just 20% the year before. The company said expenses will now total between $87 billion to $89 billion rather than its previous budget of $88 billion to $91 billion.
However, Meta warned expenses will rise to a range of $94 billion to $99 billion in 2024 as it ramps-up investment in infrastructure to supports its AI ambitions, begins rehiring to add “incremental talent” to make its new products and increases investment into its riskier projects. That means costs are increasing at a time when Meta is warning growth could suffer.
Evercore ISI said that the spending outlook for 2024, while higher than 2023, was lower than anticipated and shows that the “year of efficiency is morphing into the years of efficiency”.
Meta: Reality Labs losses to swell
Meta is trying to contain costs but is still happily funnelling more money into new projects. The Reality Labs unit that homes its experiments outside of social media, such as the metaverse and VR/AR headsets, posted an operating loss of $3.74 billion in the third quarter.
That was smaller than the $3.94 billion expected by Wall Street but Meta said the unit will burn through even more cash in 2024 as it raises investment. By the end of 2023, Reality Labs will have booked cumulative losses of over $50 billion since the start of 2019 and Wall Street sees it losing over another $18 billion in 2024! The Reality Labs unit is expected to remain deep in the red for at least the rest of this decade, suggesting Meta is yet to convince the markets that its new and costly projects will pay off.
Meta stock and AI
CEO Mark Zuckerberg said he is pleased with how its AI efforts are progressing, but said it’s too early to talk about monetization – making it the latest technology to suck money rather than make it.
Still, Meta has high hopes and is hoping AI could revolutionize its social media business. It is banking on AI to help transform apps that are popular but yet to be properly monetized, such as its messaging services. Meta said it is trying to do something different with AI than other companies like OpenAI’s ChatGPT, meaning it is all the more experimental in nature.
Where next for META stock?
Meta shares are trading lower in wake of the results as investors worry that the advertising market may not rebound as hoped in 2024, defying a more bullish tone from Wall Street brokers that largely applauded the update and see, on average, around 22% potential upside from current levels.
Meta shares plunged below the rising parallel channel yesterday and tested the $299.50 level of support, but has now also plunged below here after falling over 3% in after-hours trading in wake of its results. That is aligned with the bottom we saw in mid-July of $228.50, which should be regarded as the initial level of support today. If this doesn’t hold, there is a risk that Meta shares drop toward the support zone between $279 to $274.
On the upside, recapturing $299.50 would allow it to return above the support level and the 100-day moving average.
Nasdaq 100 analysis: Where next?
Meta is one of the largest constituents of the Nasdaq 100, making it the index to watch today.
The Nasdaq 100 suffered one of its heaviest daily falls of 2023 yesterday, which saw it plunge to four-month lows and below the bottom-end of the support zone that has been in play since June. The index had managed to stave-off setting a new lower-low for almost three months but is now showing signs that the downtrend that started in July is still in play.
Assuming the downtrend continues, we may not see the next level of support until 14,200.
A return to the support zone, above 14,400, is the immediate goal and it would need to clear 14,750 to set a new higher-high.
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