Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
What goes well with an increase in artificial intelligence spending? If you are trying to avoid a share price meltdown, then the answer is a big dollop of sales and earnings growth.
Any misgivings shareholders may have had about Meta’s spending on AI should be assuaged by the social media group’s latest results. The Facebook and Instagram parent company reported sales of $39.1bn. That is a 22 per cent jump from the year ago period and topped analysts’ expectations. Net income was up 73 per cent at $13.5bn.
Meta makes nearly all its revenue from advertising. The solid numbers suggest that Meta (unlike everyone else) has found a use for AI: its efforts to sell more targeted ads are paying off.
Meta’s Advantage+, which lets businesses automate parts of their advertising campaigns, is gaining popularity and is helping to take advertising dollars away from smaller rivals such as Pinterest. AI is also helping Meta get better at deciding which ads to show users across its platforms and when. Improving so-called monetisation efficiency means Meta can increase revenue and conversions without showing more ads, which would risk annoying users.
The benefit of this is then reflected in the higher prices Meta has been able to charge for ads during the quarter. A healthy jump in operating margins to 38 per cent more than offset the rise in costs and expenses.
This makes Meta’s plans to “significantly” boost capital expenditure next year more palatable to investors. The company said it could spend as much as $40bn on capex this year as it builds up AI computing capacities. But, as the saying goes, you need to spend money to make money. The battle for ad dollars will only get more intense as companies ranging from JPMorgan to Walmart and Uber all join the digital ad gold rush. Meta, which controls more than a fifth of the $300bn a year US digital advertising market, needs to defend its turf.
Shares in Meta, up 47 per cent over the past 12 months, rose 7 per cent in after-market trade. By contrast, shares in Alphabet and Microsoft both fell on plans to increase AI spending. Despite the gains, Meta shares are not particularly expensive on 22 times forward earnings, in line with Alphabet but below Microsoft’s 32 times.
Mounting losses in its Reality Labs unit, which makes Quest mixed-reality headsets, do not help; nor do regulatory concerns or questions about how enduring the advertising spend from Temu and Shein will prove. But more signs that Meta is finding ways to monetise its AI investments should help narrow that gap.