Meta’s stock heads south on slow user growth and ongoing infrastructure investments

Shares of Facebook parent company Meta Platforms Inc. were heading lower in late trading today after the company reported lower-than-expected user numbers and revealed plans to ratchet up its data infrastructure spending in fiscal 2025.

The disclosures came as Meta revealed its fiscal 2024 third-quarter financial results, delivering a solid beat on both earnings and revenue. The company said its earnings before certain costs such as stock compensation came to $6.03 per share, well ahead of the analyst’s $5.25 per share target, while revenue jumped 19%, to $40.59 billion, above the $40.29 billion consensus estimate.

Meta also reported net income of $15.7 billion in the quarter, rising from a profit of just $11.6 billion one year earlier. But although the 35% increase in profitability looks good, it’s actually the slowest rate of growth for that metric since the second quarter of fiscal 2023.

Although the financials look good, investors were more concerned about Meta’s user growth. The company said it had 3.29 billion daily active users across apps such as Facebook, Instagram and WhatsApp at the end of the quarter, up 5% from a year ago but below the Street’s target of 3.31 billion.

Investors also appear to be concerned about the scale of Meta’s ongoing investments in the data center infrastructure it needs to support its ambitions in artificial intelligence. The company raised its capital expenditure guidance for fiscal 2024 to a range of $38 billion to $40 billion, up from an earlier estimate of $37 billion to $40 billion. In addition, Meta said it expects those expenses to “grow significantly” in fiscal 2025, as its infrastructure expansion plans accelerate.

“Our AI investments continue to require serious infrastructure, and I expect to continue investing significantly there, too,” Meta founder and Chief Executive Mark Zuckerberg (pictured) said on a conference call with analysts.

Meta’s infrastructure build out has seen it spend billions of dollars on Nvidia Corp.’s advanced graphics processing units, as well as other data center equipment that’s needed to power AI models such as Llama. It has also been spending money on hardware to try and bolster its core advertising business, which was disrupted by Apple’s 2021 iOS privacy update. According to Zuckerberg, more than 1 million advertisers are now using Meta’s generative AI technology to improve targeting and generate more compelling ads.

Wall Street investors are said to be increasingly concerned that tech giants like Meta, Microsoft Corp. and Alphabet Inc. are spending too much money on infrastructure spending without seeing any immediate returns on those investments. Zuckerberg acknowledged this himself in an interview with Bloomberg in July, when he admitted that some companies might be “overbuilding now.” However, he justified it by saying the risk of underinvesting is too great.

On the conference call, he once again reiterated the necessity of building out Meta’s data centers.

“The formula around building out the infrastructure is maybe not what investors want to hear in the near term,” he said. “But, I just think that the opportunities here are really big, we’re going to continue investing significantly in this and I’m proud of the teams that are doing great work to stand up a large amount of capacity so that way we can deliver world-class models and world-class products.”

Despite the increased capital expenditures, Meta’s said it’s now forecasting its total expenses for fiscal 2024 to come to between $96 billion and $98 billion, down from its earlier guidance range of $96 billion to $99 billion.

Ad sales increase

As always, investors were keen to hear about the health of Meta’s advertising business, and the results were a bit of a mixed bag. The company said its advertising revenue grew by 19% from a year earlier, to $39.9 billion, accounting for 98.3% of the company’s total sales in the quarter.

There were concerns about ad spending in the Asia-Pacific region, though. Revenue there increased 15% during the quarter, down from growth of 28% sequentially. According to Meta Chief Financial Officer Susan Li, this deceleration was the result of “lapping demand” from Chinese advertisers such as the online retail giants Temu and Shein, which have slashed their digital ad spending budgets.

As always, Meta’s Reality Labs business, which houses its metaverse and virtual reality initiatives, continued to bleed cash. It posted an operating loss of $4.4 billion in the quarter, though this was lower than the analyst forecast of a $4.68 billion loss. Its sales jumped 29% from a year earlier, to $270 million, lower than the $310.4 million analyst forecast. The latest numbers mean that Reality Labs has now delivered a total operating loss of more than $58 billion since it was founded in 2020.

Looking to the fourth quarter, Meta said it’s eyeing total revenue of between $45 billion and $48 billion, with the midpoint of that range coming in just ahead of the Street’s target of $46.3 billion.

All told, it seemed investors were a little disappointed with Meta’s report, as the company’s stock fell just over 3% in the after-hours trading session.

Photo: Anthony Quintano/Flickr