Meta, formerly known as Facebook, recently released its Q3 earnings, surpassing analysts’ expectations. Despite the positive results, the company faces uncertainty in its revenue outlook for 2024.
Strong Q3 earnings
Meta reported robust financials for the third quarter of 2023. The company’s revenue reached $34.15 billion, marking a 23% increase compared to the previous year. This figure exceeded the $33.51 billion forecast by analysts. Moreover, diluted earnings per share (EPS) soared to $4.39, up from $1.64 in the same period last year, surpassing the $3.60 predicted by analysts.
One notable highlight was the improvement in Meta’s advertising business. Despite a 6% decrease in ad prices during the quarter, it was a substantial improvement considering the sharp double-digit price declines observed over the past 18 months. This milder decline also outperformed analysts’ expectations of an 8.9% drop. Analysts now express greater confidence in the potential for ad prices to return to growth.
Uncertainty for 2024
While the positive Q3 results initially boosted Meta’s stock in after-hours trading, it later experienced a decline of over 3%. This sudden reversal was attributed to Meta’s chief financial officer, Susan Li, who voiced concerns about uncertain macroeconomic conditions, stating that “the revenue outlook is uncertain” for 2024.
This caution casts doubt on whether the improvements witnessed in Q3 can be sustained. Although Meta’s revenue guidance for the fourth quarter falls within analysts’ expectations at $36.5 billion to $40 billion, the wider-than-usual range reflects the company’s increasing uncertainty about the future.
Increased spending in 2024
Meta had previously described 2023 as a ‘year of efficiency,’ during which it cut costs and streamlined its operations. This efficiency drive resulted in a doubling of its operating margin to 40% in Q3 compared to just 20% the previous year. However, Meta now anticipates higher expenses in 2024, ranging from $94 billion to $99 billion. This increase is attributed to the company’s plan to invest in infrastructure to support its AI ambitions, rehire talent for new products, and allocate more funds to riskier projects.
These rising expenses come at a time when Meta is warning about potential growth challenges in the coming year. Analysts see this shift as a transition from the ‘year of efficiency’ to what can be dubbed the ‘years of efficiency.’
Reality Labs unit’s mounting losses
Despite its cost-cutting efforts, Meta continues to allocate substantial funds to new projects. The Reality Labs unit, responsible for endeavors beyond social media, such as the metaverse and VR/AR headsets, reported an operating loss of $3.74 billion in Q3. While this loss was smaller than Wall Street’s expectations, Meta anticipates an even greater cash burn in 2024 as it increases investments in this unit. By the end of 2023, Reality Labs will have accumulated losses exceeding $50 billion since 2019, with projections of an additional $18 billion in losses for 2024.
These mounting losses indicate that Meta is yet to convince the market that its costly projects will yield substantial returns.
AI ambitions and monetization
Meta’s CEO, Mark Zuckerberg, expressed satisfaction with the progress of its AI efforts, which he believes could revolutionize the company’s social media business. However, he stated that it is too early to discuss monetization strategies. Meta’s approach to AI differs from other companies, emphasizing experimentation and innovation.
Meta stock’s outlook
Following the earnings report, Meta stock experienced a decline, reflecting investors’ concerns about the advertising market’s potential failure to rebound in 2024. While Wall Street analysts largely applauded the update, Meta shares plunged below the rising parallel channel and tested support at $299.50. If this support level does not hold, there is a risk of Meta shares dropping toward the support zone between $279 and $274.
On the upside, reclaiming the $299.50 level would position Meta above the support level and the 100-day moving average.
Nasdaq 100 analysis
Meta is a significant component of the Nasdaq 100 index, making it pivotal to the index’s performance. The Nasdaq 100 experienced one of its most significant daily declines in 2023, falling to four-month lows and breaching the support zone that had been in play since June. This decline suggests that the downtrend, which began in July, remains intact. Assuming the downtrend continues, the next level of support may not be encountered until 14,200.
A return to the support zone above 14,400 is the immediate goal, and surpassing 14,750 would establish a new higher high.
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As Meta navigates the challenges and opportunities in the AI and advertising landscape, its performance will continue to shape investor sentiment and influence the broader Nasdaq 100.