Yesterday (30 July), after the US market had closed, Meta (NASDAQ:META) released its latest quarterly earnings. Ahead of the market opening, Meta shares are trading over 11% higher. We’ll have to see what exactly the share price opens at, but it’s a clear sign of positivity. Here’s what’s going on.
Earnings rundown
The focus for Meta recently has been on large-scale investments into AI and superintelligence projects. CEO Mark Zuckerberg has been actively recruiting for this area and paying big bucks to poach employees from other companies. The results showed early signs that this capex isn’t coming at the expense of profit.
Revenue jumped 22% versus the same quarter last year, with earnings per share up 38%. Engagement across existing platforms remains high, with the number of daily active people up 6% to 3.48bn. All of this came while capex spend doubled to just over $17bn.
Looking ahead, capex is expected to ramp up further in the coming quarters. Yet investors are clearly happy about the increase in spending, being confident that it can yield long-term profits for shareholders.
Stock gains
Meta shares are already up 46% over the past year, and this doesn’t account for any of the move overnight. Although the US stock wouldn’t quite be at 52-week highs, some might be concerned about buying now due to valuation worries.
I disagree, noting the price-to-earnings ratio of 26.58. Even though this might seem high to UK investors (the FTSE 100 average ratio is 16.5), it’s essential to consider it in relation to other large US tech stocks. For example, Microsoft has a ratio of 39.46. Apple is at 32.56. So I don’t feel that Meta is expensive at all from this perspective.
Another factor to consider is the blend of existing revenue and new potential growth areas. Meta has a good advertising business that’s churning out reliable profits. The latest AI superintelligence projects have the ability to really move the needle in the coming years. Yet until then, the business has a proven business model. Therefore, the risk for shareholders is manageable, even if this specific AI push isn’t as successful as it’s being made out to be.
Risks to note
One concern I do have is the size of the competition in the AI space. It’s not only the other large US tech companies, but also smaller companies out of China. These have already produced cheaper and lower-cost AI models and other related ideas that could undermine the significant capex spend being made by Meta. In a sector that’s developing at such a rapid pace, Meta needs to ensure it stays as one of the leaders.
Even with this, I do like the stock and feel investors should consider it for potential further gains following this strong set of results.
