The June quarter earnings season was quite volatile for major technology companies. With the rapid growth driven by AI in recent years making comparison difficult, investors are focused on how companies manage to expand their margins while increasing capital expenditures. As a long-term Meta Platforms (META) bull, I remain optimistic as the company’s second-quarter results not only beat expectations but also outperformed those of other AI technology giants, helping it become an outperformer this earnings season.
Meta’s third-quarter guidance further boosts confidence, showing that despite difficult comparisons, AI spending is having a positive impact on near-term results, strengthening the long-term outlook. In this article, I’ll cover Meta’s key Q2 highlights and explain why its approach to AI appears to be effective, addressing both short-term concerns and long-term shareholder expectations.
Meta’s Q2 results were better than expected
When I wrote about Meta’s earnings expectations in a previous article, I was cautious due to the typical volatility after earnings. As expected, the volatility was high, but this time it was positive for META’s bulls.
Meta’s performance was less surprising, as the company has a history of beating forecasts. Still, it’s impressive given the tough comparisons. Analysts were expecting second-quarter revenue to rise 20%, compared to 27% in the first quarter. Meanwhile, Meta posted revenue of $39.1 billion, a 22% annual increase and beating Wall Street’s forecast of $38.3 billion.
This growth suggests that Meta is gaining more market share in the advertising space as advertisers shift from traditional methods to digital platforms like Instagram and Facebook. The success of Meta’s short-form video platform Reels, which counters the popularity of TikTok, also plays a role.
Revenue growth led to a 58% increase in operating income to $14.8 billion, up from $9.4 billion a year earlier. With an operating profit margin of 38%, Meta’s model is impressive, especially considering that most of its services are free.
Despite its massive market share, Meta grew its daily active users by 7%, reaching 3.27 billion. This broad user base and increased engagement gives Meta a strong competitive advantage. Ad impressions on its apps increased 10% year-over-year, driven by higher user engagement and more ads served.
What’s particularly notable is that Meta achieved these strong operating metrics with fewer employees. The company reduced its headcount by 7,800 in the second quarter, underscoring Mark Zuckerberg’s effective cost management and contributing to the significant increase in operating profit.
This is what distinguishes Meta in the current reporting season
A key concern for the second quarter for major technology companies, especially given the AI boom, was capital expenditure (CapEx) and revenue and profit forecasts. For example, major players such as Alphabet (GOOGL) and Microsoft (MSFT) disappointed investors with high spending on AI that did not lead to a corresponding increase in margins in the cloud segment.
So the big question is: what return will Meta get from this spending and when will these benefits become visible?
To answer this question, one must know that Meta’s focus on AI is to improve its advertising business and consumer behavior on its platforms. Second, the company expects to drive revenue growth by scaling new AI-based products such as Meta AI and AI Studio.
Given this clear focus, Meta’s third-quarter outlook helped ease concerns about inconsistent earnings. The company forecast third-quarter revenue between $38.5 billion and $41 billion, up 20% despite difficult comparisons. This made it clear that investments in AI are already paying off, particularly in the way Meta manages capital and operating expenses.
In addition, Meta increased its annual capital expenditure forecast to $37-40 billion from $35-40 billion, but this did not have a negative impact on the stock price. The stock performed well, rising around 7% after the second quarter results, while other Big Tech peers, with the exception of Apple (AAPL), saw their shares decline following the earnings reports.
Meta also warned that capital expenditure will continue to rise through 2025. While that sounds significant, current data does not suggest long-term concerns. On the contrary, Meta is seeing revenue growth, more daily active users, and more ad impressions, all of which point to higher user engagement and effective AI recommendations.
The bottom line is that, in my opinion, Meta is currently the best performing Big Tech company when it comes to meeting growth expectations in the AI space. It has cleverly balanced shareholder expectations in the short term with its long term growth ambitions.
In fact, Nvidia CEO Jensen Huang – dubbed the “godfather of AI” by tech analyst Dan Ives of Wedbush – has hailed Meta Platforms and its CEO Mark Zuckerberg as a pioneer in the field of AI. This recognition comes after the integration of Meta AI into the company’s social media platforms and the successful launch of Llama 3.1, an open-source AI project.
What could go wrong with Meta?
Investors in Meta should be prepared for price volatility and an aggressive investment strategy. Although Meta posted strong second-quarter results despite difficult comparatives, challenges are expected to increase quarter-on-quarter. With capital expenditures increasing through at least 2025, future returns on these large expenditures remain uncertain.
Currently, META stock is trading at a price-to-earnings ratio of 24, which is close to its five-year average of 23. I believe this valuation is reasonable for long-term investors, but short-term volatility can still occur.
Is META stock a buy according to analysts?
Meta Platforms stock is rated as a strong buy by Wall Street analysts. Of the 28 analysts covering the stock, only two are bearish, two are neutral, and the remaining 24 are bullish. 12 analysts have raised their price targets for META, with the average price target for META stock now at $549.35. This suggests an upside potential of 6.7% based on the current share price.
View more META analyst ratings
Key finding
Meta recently delivered a solid quarter, beating market estimates and providing promising guidance for the third quarter despite difficult comparisons. This performance shows that investments in AI have already paid off and will likely continue to benefit the company in the second half of the year. Currently, Meta stands out among Big Tech companies for its effective balance of near-term growth and long-term potential amid the AI boom.
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