Meta Soothes AI Skepticism with its Q2 2024 Results

Meta Strong Results Helped by AI

Wall Street has been rallying since last year, thanks to the AI revolution spearheaded by tech giants like Nvidia, Micorsoft and others, which has benefited their stocks. This earnings season however comes against a backdrop of skepticism around the sustainability of the AI boom and as to whether the massive amount of money thrown to develop the technology will deliver results.

Last week, Alphabet delivered mostly solid results ^[1], but once again failed to show a return on its AI investment and continues to play catch up with Microsoft. The latter is ahead in the AI arms race and has started to monetize its early lead, with AI services contributing 8 percentage points in the 29% revenue growth of its Azure cloud business ^[2]. However markets were largely disappointed by the Intelligent Cloud revenue slowdown, sending the stock down.

So Meta Platform was facing a challenging backdrop as markets were set to scrutinize its top and bottom lines and its capital expenditures, which had spooked them in Q1. The social media giant has been spending heavily on developing its Artificial Intelligence capabilities and the trend continued in the second quarter, as it reported a 7% increase in expenses and a 33.4% y/y in Capital Expenditures. ^[3]

However, Meta made the point that its heavy spending is already bringing results and managed to soothe the AI skepticism, with its stock rising in after-hours trading following the earnings report. Net income grew 73% y/y to roughly 13.65, while total revenue came in at 39.071 billion, up 22% y/y. The company expects sales to grow up to 20% and as high as $41 billion in the current quarter, which would mark a new record.

Unlike the years of its focus on the Metaverse which created a black hole in its financials, its AI spend is accompanied by strong growth in its top and bottom lines, which outperforms its expenses. Moreover, executives insisted on the earnings call that although it is not yet a meaningful revenue driver, AI is already yielding results.

CEO Mark Zuckerberg touted improved recommendations and user engagement on Facebook and Instagram due to AI advancements, which also make the advertising experiences "more effective" ^[4]. This is a crucial point as advertising is Meta's revenue engine and the digital ad market is rebounding from recent adversities, with Emarketer expanding growth to accelerate further this year ^[5]. CFO Susan Li doubled down, saying that ad delivery is improving due to AI, leading to "ad performance and efficiency gains". Meta's advertising sales grew nearly 22% in the second quarter, almost double the pace of Google. Ad impression slowed sequentially to 10%, but average price per ads accelerated.