AI: Can Meta Turn the Tide in Its Battle Against the Dual Challenges of Opposing Forces?

On Wednesday, U.S. stocks showed notable divergence within the technology sector. Microsoft experienced a decline of over 2% due to a slowdown in its cloud business growth for the second quarter. In contrast, chip giant AMD reported better-than-expected earnings, causing its stock to surge over 10%. NVIDIA saw a gain of more than 9%, while other semiconductor companies like TSMC, Micron Technology, and Qualcomm also experienced significant increases. This divergence reflects the starkly different conditions in the AI industry: companies like Microsoft are struggling with growth, while semiconductor firms like NVIDIA are reaping substantial profits.

As the earnings season for technology stocks heats up, AI spending remains the top focus for investors, who are keen to determine how long it will take for tech companies to see returns on their AI investments. Following the market close on Wednesday, Meta's second-quarter earnings report is expected to provide further insights. According to Citigroup's forecasts, driven by AI initiatives, Meta may achieve strong revenue and profit growth for Q2, with capital expenditures projected to increase by 43.3% quarter-over-quarter, reaching $9.6 billion—slightly above the market expectation of $9.4 billion.

AI Investment Continues to Be a Priority

“AI remains a focal point for Meta, as the competitive landscape for large models is just beginning,” stated Mike Proulx, Vice President and Research Director at Forrester, ahead of the earnings report release. He noted that terms like "metaverse" and "Horizon Worlds" are likely to feature minimally, if at all, during the earnings call. Citigroup's earlier research indicated growth in user numbers for both Threads and Facebook during Q2. As of May, 40 million users aged 18-29 were recorded on Facebook in the U.S. and Canada, the highest in three years. Additionally, Threads’ monthly active users reached 175 million in May, up by 25 million from the previous month. An increase in user numbers can enhance appeal to advertisers, thus driving Meta's revenue growth.

In Q2, Meta launched Llama 3.1, which dramatically increased its parameters to 405 billion, far surpassing its predecessor's 70 billion. Citigroup noted that integrating Llama 3.1 into Meta's operations will enhance AI capabilities, improving user and advertiser acquisition. Meta CEO Mark Zuckerberg recently acknowledged that the company may have overspent on AI infrastructure but emphasized that the risks of underinvestment far outweigh those of overspending.

Strong Revenue Growth Expected for Q2

Analysts predict that Meta's revenue for Q2 will reach $38.3 billion, marking a 20.1% year-over-year increase, with earnings per share projected at $4.74, up 59.1%. Citigroup is even more optimistic, forecasting total revenue at $38.5 billion. According to market consensus, Meta's suite of applications, including Facebook, Instagram, WhatsApp, and Messenger, is expected to generate $37.7 billion in revenue, an 18.9% increase year-over-year. Like Google, Meta is anticipated to benefit from advertising related to the upcoming U.S. elections and the Olympics.

Proulx mentioned that Meta's profitability in Q2 is expected to be robust, and as market share expands, its short-video platform Reels is likely to continue its growth trajectory. Although Threads has shown that it can compete with X, its ability to generate substantial profits remains uncertain. Jefferies analyst Brent Thill shared a similarly optimistic outlook for Meta, noting that most analysts he spoke with indicated strong growth in Meta's advertising budget, though some are beginning to see the effects of tougher year-over-year comparisons. Regarding the Reality Labs segment, analysts forecast revenue of $376 million for Q2, up from $276 million a year earlier, despite ongoing cash outflows in this division.