Meta reports strong global ad sales while managing AI costs

Meta Platforms beat market expectations for second-quarter revenue on Wednesday and issued a rosy sales forecast for the third quarter, signaling that robust digital-ad spending on its social media platforms can cover the cost of its artificial-intelligence investments.

Shares of the company were up 6.8% after the bell.

The Facebook and Instagram parent said it anticipates third-quarter revenue in the range of $38.5 billion to $41 billion, the midpoint of which is higher than analysts' estimates of $39.1 billion, according to LSEG data.

Revenue rose 22% to $39.1 billion for the April to June period, Meta said, compared with analysts' expectations of $38.3 billion.

Meta Chief Financial Officer Susan Li told analysts on a call that the company was "continuing to see healthy global advertising demand" and was also reaping the fruits of a multiyear project to use artificial intelligence to improve targeting, ranking and delivery systems for digital ads on its platforms.

Li and Chief Executive Mark Zuckerberg said those tools would continue to drive growth in the coming two years, while new generative AI features like chat assistants would take longer to monetize.

Shares of social media app Snap which likewise relies heavily on digital advertising, rose 3% after the Meta report.

"Any apprehensions investors may have had about Meta's spending on AI and the metaverse are likely to be allayed by this quarter's results," said eMarketer analyst Max Willens.

"With its margins as healthy as they are, Meta's investors should feel comfortable with the company's vigorous investments in its plans for the future," Willens added.

Although Meta's costs rose 7% in the second quarter, its revenue jump topped expense growth substantially and led to a 9-point rise in operating margin, to 38% from 29%.

Family daily active people (DAP), a metric used by the company to track how many unique users per day open any one of its apps, was likewise up 7% year-over-year to an average of 3.27 billion for June.

Meta's earnings come after disappointing results posted by fellow tech industry powerhouses which suggested the payoff from hefty investments in AI technology may take longer than Wall Street had hoped.

Microsoft  said on Tuesday it would spend more money this fiscal year to build out AI infrastructure, while Google parent Alphabet warned last week that its capital spending would stay elevated for the rest of the year.

Like both of those companies, Meta has been plowing billions of dollars into its data centers in an effort to capitalize on the generative AI boom. Its shares sank in April after it disclosed a higher-than-expected expense forecast, quickly knocking $200 billion off its stock-market value.

That ended a run of strong quarters for Meta, which has climbed back from a share price meltdown in 2022 by slimming its workforce and leaning in to investor excitement about generative AI technologies.

Debra Aho Williamson, founder of research firm Sonata Insights, said she saw Meta's results as a "bellwether" for AI stocks.

"If a company can show strong results from its core business, its investments in AI will be seen more positively. If the core business is showing any sign of weakness — as we saw last week with Alphabet's YouTube—then the stock may seem more risky," she said.

Meta has picked up hiring over the last year, particularly of AI engineers, while continuing to quietly dissolve teams elsewhere. It said on Wednesday that its workforce was down 1% year-over-year, though Li said she expected head count to be "meaningfully higher" by the end of the year.

The social media giant also signaled it would continue to spend big on AI infrastructure, anticipating 2024 capital expenditure would come in between $37 billion and $40 billion, up $2 billion at the lower end from its previous forecast of $35 billion to $40 billion.

It left its total expense forecast for the year unchanged at $96 billion to $99 billion, while cautioning that infrastructure costs would continue to be a "significant driver" of expense growth in 2025.

Losses associated with the company's metaverse unit Reality Labs, which produces virtual reality headsets, smart glasses made with EssilorLuxottica's Ray-Ban and upcoming augmented-reality glasses, would also continue to "increase meaningfully," it said.

Although Meta executives have said the latest version of the smart glasses was a bigger hit than expected, Reality Labs lost nearly $4.5 billion in the second quarter, and Li attributed growth in the unit's revenue mainly to sales of its Quest virtual-reality headsets.