Meta Stock Slides Despite Q1 Earnings Beat. Is “AI Fever’ To Blame?

Meta Platforms (META) late Wednesday posted first-quarter earnings results that topped expectations, with 27% year-over-year revenue growth. But Meta stock fell sharply as the company gave lower than expected revenue guidance and raised its expectations for spending, citing its artificial intelligence push.

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One analyst called Meta a victim of “AI fever.” Chief Executive Mark Zuckerberg defended the company’s plan to “invest significantly more over the coming years” to advance its AI ambitions. But the report triggered a sell-off. On the stock market today, Meta stock plunged more than 14% to 420.75 in morning trades.

The harsh response comes despite Meta clearing a high bar for its first-quarter results. The company said in a news release that it earned $4.71 per share on sales of $36.46 billion for the March-ended quarter. On average, analysts projected Meta would post earnings of $4.32 per share on sales of $36.14 billion, according to FactSet. Sales jumped 27% year over year while earnings increased 114%.

Meta Guidance For Q2 2024

Meta’s guidance for the current quarter missed the mark, however. Meta guided for sales between $36.5 billion and $39 billion, or $37.75 billion at the midpoint of its range. That was short of the $38.25 billion in sales for the June-ending quarter that analysts were projecting, according to FactSet.

The midpoint of its range would represent roughly 18% year over year revenue growth for Meta’s second quarter, compared to sales growth of 27%, 24.7% and 23.2% in Meta’s three previous quarters. But analysts anticipated that Meta’s growth rate would slow this year, as the company came up against harder year-over-year comparisons.

But rising costs may have caught some investors off guard.

Meta’s AI Ambitions

Meta now projects capital expenditures between $35 billion and $40 billion this year, increased from the company’s prior range of $30 billion to $37 billion. Meta expects overall expenses for the year to fall between $96 billion and $99 billion, up from a previous given range of $94 billion to $99 billion.

On a call with analysts Wednesday, Zuckerberg highlighted that the company released updates to its Meta.ai chatbot and Llama large language model last week.

“I view the results our teams have achieved here as another key milestone in showing that we have the talent, data and ability to scale infrastructure to build the world’s leading AI models and services,” Zuckerberg said. “And this leads me to believe that we should invest significantly more over the coming years to build even more advanced models and the largest scale AI services in the world.”

Brian White, an analyst with Monness Crespi Hardt, described the market response to Meta in client note titled “AI Fever Claims Yet Another Victim.” He maintained a buy rating and price target of 540. But he cautioned about the challenges ahead for the company.

“Meta’s AI ambitions are driving increased spending and we expect more AI casualties,” White wrote in a note to clients Wednesday. “We believe Meta is well positioned to benefit from the digital ad trend, innovate with AI, leverage a leaner cost structure, and capitalize on the potential demise of TikTok; however, regulatory scrutiny persists and we believe the darkest days of this economic quagmire are ahead of us.

Futures Fall; Meta Dives, Leads 5 Key Earnings Movers

Ad Market Strength

Meanwhile, a strong quarter for Meta’s advertising business was overshadowed by the AI spending concerns.

Ad pricing was up 6% year over year, compared to 2% growth in the previous quarter. The company again had strong growth from ad-buyers in the Asia-Pacific region, where spending increased 41% year over year. Meta has benefited from e-commerce businesses in China — such as Temu — buying ads to reach shoppers in other markets. But Meta CFO Susan Li cautioned that Meta will now be “lapping periods of increasingly strong demand” from Chinese advertisers.

Still, Meta’s strong ad performance does not seem to be helping other social media stocks. Snapchat parent Snap (SNAP) is down nearly 5% in premarket trading. Reddit (RDDT) and Pinterest (PINS) were lower in early trading as well. They could be hit by concerns about Meta’s guidance. Snap reports earnings later Thursday, while Reddit and Pinterest are scheduled for next week.

Bernstein analyst Mark Shmulik maintained a buy rating for Meta following the report. But he lowered his price target to 565, from 590. Still, he highlighted that Meta is back to “attacking” markets after a 2022 slide that put it on the defensive last year.

“Meta’s handled every challenge that’s come their way — TikTok, privacy, cash burn — and come out the other side stronger, leaner, and prouder,” Shmulik wrote. “There’s a difference between defense and offense, where expectations are higher and uncertain. But offensive is more fun, isn’t it? We’re buyers.”

Meta Stock: Technical Ratings

Meta stock’s slide will put a big dent in its strong run. Prior to its slide late Wednesday, Meta stock trailed only Nvidia (NVDA) for the best performance in 2024 among the “Magnificent Seven” stocks that helped power the stock market rally in 2023.

Coming into the report, Meta stock had a perfect IBD Composite Rating of 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.

Further, Meta’s IBD Relative Strength Rating was 96 out of 99.

Meta stock is on several IBD stock lists, including Tech Leaders, IBD 50, Big Cap 20 and the premium IBD Leaderboard list.

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