Meta: AI Spending Will Strain FY2025 Earnings But Boost Long-Term Engagement

Summary:

  • META is currently in a growth normalization stage, with advertising revenue growth decelerating due to a significant slowdown in ad impression growth.
  • The company 4Q FY2024 guidance indicates that its revenue growth and operating margin will sequentially improve compared to 3Q.
  • Management indicated higher capex in 4Q and a significant increase in FY2025, leading to higher depreciation and operating costs, which will impact earnings more than operating cash flow.
  • Elevated capex will focus on GenAI, enhancing customer engagement and ad conversion for advertisers.
  • The stock is currently trading at 25x forward non-GAAP P/E, a reasonable valuation compared to the broader market, justified by above-average growth and margins.

Meta European headquarters

Derick Hudson

What Happened

Meta Platforms (NASDAQ:META)’s stock experienced a 5% pullback despite delivering solid 3Q FY2024 earnings. As the company enters a phase of growth normalization, investors may be cautious about significant increases in capex going forward. Excluding cyclical effects


Analyst’s Disclosure: I/we have a beneficial long position in the shares of META either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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