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Meta Platforms beats street expectations, yet investors remained concerned: Why?

Meta platforms Inc

Investors were able to lap up strong gains on the shares of Meta Platforms, Inc. this year as the stock has gone up by ~149.10% on YTD basis. At the time of earnings release, the company announced that it saw a good quarter. The company saw strong engagement throughout its apps and it has the most exciting roadmap with Llama 2, Threads, Reels, new AI products in the pipeline, and roll-out of Quest 3 this fall. The company’s revenues came in at $32.0 billion, exhibiting a rise of 11% year-over-year, and 12% year-over-year growth was seen on constant currency basis. It saw capital expenditures of $6.35 billion for 2Q23. These expenditures include principal payments on finance leases. 

The company ended the quarter with cash, cash equivalents, and marketable securities of $53.45 billion as of June 30, 2023. FCF came in at $10.96 billion in 2Q23. 

Meta Platforms, Inc. is so optimistic about the future of metaverse that it decided to change its name and ticker symbol. The company continues to spend billions into relatively new segment of its business which is completely focused on virtual reality — Reality Labs. 

On 31 May 2022, the company announced that its Class A common stock should trading on NASDAQ under the ticker ‘META’ before the market opens on June 9, 2022. As a result, this should replace its ticker symbol ‘FB.’ This new symbol aligned the company’s rebranding from Facebook to Meta. This significant optimism about this risky segment is the main reason Meta Platforms, Inc. might be a riskier bet. 

In 2Q23, the company saw an overall operating profit of $9.4 billion, exhibiting 12% growth on year-over-year basis. This healthy growth was because of growth in its Family of Apps segment, including Instagram, WhatsApp, Facebook, and Messenger. All of these form its core social media assets. 

During its quarterly release, the company commented that it expects several factors to result in total expense growth in 2024 as it plans to invest in its most compelling opportunities such as artificial intelligence (AI) and metaverse. Therefore, the company has no second thoughts on making investments on metaverse. Yet, it expects losses to increase for Reality Labs. 

Meta Platforms, Inc. expects its FY23 total expenses to range between $88 billion-$91 billion, exhibiting a rise from its prior range of $86 billion-$90 billion as a result of legal-related expenses which were seen in 2Q23. This outlook consists ~$4 billion of restructuring costs which are related to facilities consolidation charges and severance and other personnel costs. Apart from this, the company expects operating losses from Reality Labs to increase year-over-year in 2023. 

The company expects increased infrastructure-related costs in the next year. Given its higher capital investments over past couple of years, it anticipates depreciation expenses in 2024 to rise by the larger amount than in 2023. Apart from this, it anticipates to incur increased operating costs from running larger infrastructure footprint. 

It expects rise in payroll expenses as it evolves its workforce composition toward higher-cost technical roles.

For Reality Labs, the company continues to anticipate operating losses to increase year-over-year because of its ongoing product development efforts in AR/VR and investments to further scale the ecosystem. Therefore, investors should take these warning signs seriously as the company expects its losses for Reality Labs might get worse.

The second concern is declining revenues from Reality Labs. 

In Q2, the company’s quarterly revenue saw year-over-year increase of 11% and the business was supported by growth in its strong Family of Apps segment. As a matter of fact, the ad market seems to be strong and the company seems to benefit from favourable sectoral dynamics. Meta seems to capitalise on government crackdowns on TikTok use and less popularity of Twitter. 

Investors should be concerned that if this growth does not sustain, Reality Labs might not be able to make up for any sort of shortfall. In 2Q23, Reality Labs saw revenues of $276 million in comparison to $452 million in 2Q22. However, the company’s advertising revenue grew from $28.15 billion in 2Q22 to $31.49 billion in 2Q23. 

Even though this segment doesn’t account for significant portion of the company’s business, decline in sales can pose some challenges.

Therefore, it seems that Meta’s stock performance is being supported by the performance of the company’s Family of Apps segment.

Apart from Meta, there are other tech stocks which have delivered strong gains in this year. On the YTD basis, stock of Amazon.com, Inc. saw ~62.63% gain and stock of Microsoft Corp delivered 36.81% gain. 

The company expects 3Q23 total revenue of $32 billion-$34.5 billion and this guidance assumes foreign currency tailwind of ~3% to year-over-year total revenue growth in 3Q given current exchange rates. FY23 total expenses are expected in the range of $88 billion-$91 billion, a rise from its prior range of $86 billion-$90 billion as a result of legal-related expenses which were recorded in 2Q23. 

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I'm Ved Prakash, Founder & Editor @Newsblare Media, specialised in Business and Finance niches who writes content for reputed publication such as Investing.com, Stockhouse.com, Motley Fool Singapore, etc. I'm the contributor of different... news sites that have widened my views on the current happenings in the world.

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