One of the hottest Magnificent Seven stocks, Meta Platforms (NASDAQ:META), cooled off on Thursday after the company reported a mixed bag for its first-quarter earnings.
To sum it up, the results were solid, but investors found the near-term outlook a bit disappointing. As a result, Meta shares plunged about 16% on Thursday morning, falling to about $416.
Higher expenses expected
Meta Platforms, which owns Facebook and Instagram, among other properties, has been on fire over the past year or so. The company’s stock price jumped 194% in 2023, and over the past year, it is up 136%. Year to date, Meta had returned about 42% prior to Thursday’s sell-off.
The first-quarter numbers illustrate Meta’s strong growth, as its revenue climbed 27% year over year to $36.5 billion, while its net income jumped 117% to $12.4 billion, or $4.71 per share. Costs and expenses were kept relatively in check, rising just 6% year over year. The results topped analysts’ estimates of $36.1 billion in revenue and earnings per share (EPS) of $4.30.
Founder and CEO Mark Zuckerberg called those results “a good start to the year” in the company’s earnings report. Daily active people across Meta’s platforms rose 7% to 3.24 billion, while ad impressions surged 20%, with a 6% increase in average price per ad.
However, the negative reaction to Meta had more to do with its outlook. The social media giant is calling for second-quarter revenue in the range of $36.5 billion to 39 billion; at the midpoint, that outlook is slightly below the $38.3 billion consensus estimate. However, it would still represent a revenue gain of 14% to 22% over the second quarter of 2023.
The more concerning aspect of Meta’s outlook may have been its projection for expenses. The company raised its full-year estimate to between $96 billion and $99 billion, up from the previous range of $94 billion to $99 billion due to higher infrastructure and legal costs.
Meta Chief Financial Officer Susan Li also said the company expects operating losses from its Reality Labs business to “increase meaningfully year over year due to our ongoing product development efforts and our investments to further scale our ecosystem.”
In addition, Meta expects its capital expenditures to be higher than previously predicted, with the range upped to between $35 billion and $40 billion from the previous range of $30 billion to $37 billion as the firm accelerates its investments in artificial intelligence (AI).
While the company did not provide guidance beyond 2024, Li said their capital expenditures will continue to increase in 2025 as the company “invests aggressively to support our ambitious AI research and product development efforts.”
Buy the dip in Meta stock?
Last quarter, Zuckerberg said 2023 was Meta’s “year of efficiency” as it streamlined operations to focus on new areas of growth like AI. Thus, this executive commentary should not come as a huge surprise, although the guidance raise perhaps was not anticipated. Still, I think Meta has taken the right steps to get here, and accelerating investments in product development and AI make sense.
The social media giant would also be the primary beneficiary if Congress’ potential ban on TikTok actually becomes a reality. There are still a lot of hoops to jump through for that to occur, but Meta is no doubt planning to better position itself to fill that potential void. This is definitely something to keep an eye on.
I don’t see Meta’s outlook as anything to be too concerned about in the long run. In fact, it is not a bad thing as the stock had become a bit overheated, with its P/E ratio ticking up to 33. I would not be shocked to see it bounce back in the days ahead with investors buying the dip. Meta is definitely a hold, and it still looks like a good buy. Now with the valuation dropping, Meta stock looks even better.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
