Meta rallies as strong ad revenue cushions AI spending
Technology
The parent company of Facebook was on track to add about $120 billion to its market value
(Reuters) - Meta (META.O) soared nearly 9% on Thursday after its rosy revenue growth signaled that strong digital-ad spending on its social media platforms can cover the cost of its AI investments.
The parent company of Facebook was on track to add about $120 billion to its market value of $1.204 trillion, after it topped second-quarter revenue expectations and forecast growth for the July-September period that was above Wall Street's estimates.
Its results were another positive sign for the digital ad market after upbeat earnings from search giant Google pushed up shares of smaller rivals such as Snap (SNAP.N) and Reddit (RDDT.N) by 2.7% and 4.4%, respectively.
The Snapchat parent is scheduled to report earnings after market close on Thursday.
Analysts said the strong report gave Meta CEO Mark Zuckerberg more time to prove that the billions of dollars the company was plowing into AI would pay off. Even though the company's costs jumped 7% in the second quarter, its strong revenue growth drove a 9-point rise in operating margin to 38%.
"Underneath a cloud of tougher comparisons, a tougher macro, and mixed peer commentary, Meta continues to look like the best place to deploy digital ad dollars on the planet," Bernstein analyst Mark Shmulik said.
"2025 capex will certainly be much higher, though whether it outgrows revenue next year remains an open question. Core AI has great return on investment, generative AI should have great return on investment," he added.
Chief Financial Officer Susan Li said on Wednesday that Meta was reaping the fruits of a multi-year project to use AI to improve targeting, ranking and delivery systems for digital ads on its platforms.
Meta expects capital expenditure between $37 billion and $40 billion in 2024. Its spending surge mirrors forecasts from fellow tech industry powerhouses that are investing heavily in AI to capitalize on the booming technology.
"GenAI will require significant infrastructure investments to train the next generation of large foundational models and Meta is getting ahead of a multi-year capacity ramp," J.P.Morgan analysts said.
Meta's 12-month forward price-to-earnings ratio stands at 21.1, compared with Alphabet's 20.6 and Microsoft's 31, according to LSEG data. Analysts have a median price target of $550 on Meta's shares.
