Meta’s $360 billion rally to collide with Lofty AI expectations

The Facebook parent has been the best-performer in the sector this year by far amid a surge in profitability. Delivering better revenue growth, it’s also cheaper than smaller peers like Snap Inc. and Pinterest Inc.

But to keep a rally that’s added more than $360 billion in market value going, Meta must show it can maintain such growth when it reports earnings on Wednesday. Of particular interest to investors: seeing a return on investment from hefty spending on artificial intelligence.

“The case is still there with some of the initiatives around AI and everything they’re doing to continue to improve targeting and engagement,” Hanna Howard, portfolio manager at Gabelli Funds, said. “There’s still room for growth on the top line and to continue to improve in margins. And, where it’s trading right now, at these levels it does still look attractive.”

In February, Meta reported massive growth in both earnings and revenue in the fourth quarter, which also illustrated the impact of cost-cutting measures that included thousands of job cuts. It also announced a $50 billion buyback program and implemented a dividend. In contrast, both Snap and Pinterest delivered disappointing growth.

That has set up high expectations that may be difficult to overcome. This time around, Meta’s profit is expected to nearly double in the first quarter, while revenue is seen growing by 26%. Still, both are expected to wane later in the year, according to data compiled by Bloomberg.

Investors will be looking for updates on AI, which Meta has been using to improve ad targeting. The company recently debuted a new version of its AI model, which will run its in-app AI assistant.

“Meta has really evolved from a social play to more of an AI one, and it has a lot of tailwinds from that,” said Jay Woods, chief global strategist at Freedom Capital Markets. “Plus, while there were some growing pains with its year of efficiency, it is a lot more efficient now.”

With the stock clearly outperforming Snap, Pinterest and Reddit this year, Meta continues to look like the bargain of the group. The stock trades at 23 times estimated earnings, a discount to both its 10-year average and the overall Nasdaq 100 Index, as well as being cheaper than social peers.

Investors apparently did not approve the Facebook’s parent company Meta’s plans to pour large sum of money into artificial intelligence (AI), wiping off $163 billion of the firm’s market value Thursday.

The share price of Mark Zuckerberg’s Meta nosedived 13% as the company reported the profits of this quarter that were doubled on a year-on-year basis, with revenue increasing 27%. The Menlo Park-based tech behemoth planned to invest $5 billion in AI as the global technology competition has jumped to another level with Microsoft, Google, OpenAI, and other famous investors jumping in to stay ahead in the race.

Despite the projections that the return on the AI investment would be massive, it is reported that the equipment necessary for such a plan will take and the cost would also be high.

"The language around spending plans has become bolder once more, and this could be what’s spooking markets," Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, was quoted in a CNN report Thursday.

“For all Meta’s bold AI plans, it can’t afford to take its eye off the nucleus of the business — its core advertising activities… Meta’s resources are vast but not infinite, and its digital advertising market share needs defending at all costs,” she added.