Meta Shares Tumble on Weak Revenue Forecast and AI Spending Plans

Meta Platforms (META) shares plunged more than 10% on Thursday, their worst day since October 2022, after the company issued weak revenue guidance and announced plans to increase spending on artificial intelligence (AI). The stock closed at $441.38, wipin out roughly $132 billion in market cap from Wednesday’s $493.50 closing price before earnings.

Earnings Beat Overshadowed by Weak Guidance

Meta reported first-quarter earnings that topped expectations, with revenue of $36.46 billion, up 27% year-over-year, and earnings per share of $4.71, beating analyst estimates of $36.16 billion and $4.32, respectively. However, the company’s guidance for the second quarter fell short of expectations, with a projected revenue range of $36.5 billion to $39 billion, compared to the average analyst estimate of $38.3 billion.

CEO Mark Zuckerberg defended the company’s plan to “invest significantly more over the coming years” to advance its AI ambitions, despite the impact on short-term profitability. Meta now projects capital expenditures between $35 billion and $40 billion this year, up from its prior range of $30 billion to $37 billion.

The midpoint of Meta’s Q2 revenue guidance would represent roughly 18% year-over-year growth, a slowdown compared to the 27%, 24.7%, and 23.2% growth rates in the previous three quarters. However, analysts had anticipated a deceleration in Meta’s growth this year due to harder year-over-year comparisons.

Analysts' Mixed Reactions

Analysts had mixed reactions to Meta’s report. Some, like Brian White of Monness Crespi Hardt, cautioned about the challenges ahead for the company, while others, such as Mark Shmulik of Bernstein, maintained a buy rating despite lowering the price target.

White described the market response to Meta in a client note titled “AI Fever Claims Yet Another Victim,” maintaining a buy rating and price target of $540. However, he warned that Meta’s AI ambitions are driving increased spending and that more “AI casualties” are expected.

Shmulik, on the other hand, highlighted Meta’s ability to handle challenges in the past, stating, “Meta’s handled every challenge that’s come their way — TikTok, privacy, cash burn — and come out the other side stronger, leaner, and prouder.” He maintained a buy rating but lowered his price target to $565 from $590.

Strong Ad Performance Overshadowed by AI Spending Concerns

Meta’s strong ad performance in the first quarter was overshadowed by concerns about rising costs and slowing revenue growth. The company benefited from increased ad spending in the Asia-Pacific region, particularly from Chinese e-commerce businesses, but CFO Susan Li warned that Meta will now be “lapping periods of increasingly strong demand” from these advertisers.

Ad pricing was up 6% year-over-year, compared to 2% growth in the previous quarter. However, the strong ad performance did not appear to help other social media stocks, with Snapchat parent Snap (SNAP), Reddit (RDDT), and Pinterest (PINS) all trading lower, possibly due to concerns about Meta’s guidance.

Despite the sell-off, some analysts see the drop in Meta’s stock as a buying opportunity. Jefferies analyst Brent Thill maintained a Buy rating, citing Meta’s “successful track record of generating meaningful returns from prior investment cycles.” The average analyst target price for Meta stock is $524.79, representing implied upside of about 20% from current levels.

Implications for the Future

Meta’s first-quarter earnings report has sparked a debate among investors and analysts about the company’s future direction. While the company’s strong ad performance and revenue growth are encouraging, the weak guidance and increased spending on AI have raised concerns about short-term profitability.

Zuckerberg’s commitment to building the world’s leading AI and the company’s track record of successfully monetizing new products have some analysts optimistic about Meta’s future prospects.

However, the increased spending on AI has also raised concerns among investors, who are closely watching how Meta balances its ambitious technology goals with maintaining a healthy bottom line. The company’s ability to execute on its AI roadmap while managing costs will be a key factor in determining its long-term success.