- Growth rate for daily active users less than expected
- Quarterly earnings and revenue beat forecasts
- Social media competition is intensifying
- Meta’s AI investment to remain ‘significant’
“The market is unforgiving of any AI-related company that fails to significantly outperform. Meta is the latest stock to feel the wrath of investors despite extending its track record of doing better than analyst forecasts on key financial measures,” says Dan Coatsworth, investment analyst at AJ Bell.
“Meta has now beaten revenue forecasts for eight quarters in a row and earnings for seven consecutive quarters. Under normal circumstances, such a run would be hailed as truly remarkable. Unfortunately, Meta’s latest results prompted a 3.6% decline in its shares in pre-market trading as one key operating metric came up short.
“While the number of daily active users for its social media platforms and apps continues to grow, the 5% increase to 3.29 billion individuals missed the 3.31 billion market forecast. It’s not simply enough for Meta to move ahead, it needs to stay in the fast lane at all times as far as the market is concerned. Investors typically care about the short term and they want more, more, more.
“Even though Meta owns some of the world’s most popular social media platforms, it still faces significant competition from the likes of TikTok, Snapchat and YouTube. Every minute someone uses a rival platform is a missed opportunity for Meta to generate advertising income. Therefore, weaker than expected daily active user figures suggest that Meta needs to do more to get people scrolling through Facebook, Instagram and its other brands.
“That’s where AI comes into play. Companies are under pressure to justify why they are spending so much money on AI and investors want to know when there will be a positive financial return on this investment. Meta is among the companies spending big and its strategy is to lay the foundations to improve the user experience before thinking about going all-in on monetising its AI capabilities.
“A lot of the heavy lifting has already been done with the use of AI to enhance content suggestions for users and improve engagement. The longer people flick through reels on platforms like Facebook and Instagram, the more adverts they will be served and the more income for Meta.
“Meta says improvements to its AI-driven feed and video recommendations led to an 8% increase in time spent on Facebook and a 6% increase on Instagram this year. Meta AI is now helping to improve search functionality on its social media platforms, answering questions and being deployed to edit images. It has further applications such as helping individuals with coding and working as a chatbot. On top of this, Meta’s Llama large language models are being used by companies and organisations including the US government and the company continues to improve its capabilities.
“All these tools and services have considerable potential for consumer and business use, creating big opportunities for Meta to make money. However, it warned of significant ongoing investment into AI, and this troubled the market. The more it spends, the more it needs to prove that consumers, companies and organisations depend on Meta services day in, day out.
“Meta founder Mark Zuckerberg says the potential for the business is ‘massive’, but there is a big difference between saying something and achieving it. The longer-term share price performance would suggest that plenty of people have faith in Zuckerberg but the pullback on the latest results implies there are a few cracks appearing. Meta needs to prove the naysayers wrong.”
