Meta Platforms (META) Q2 2024 Earnings Review

The social media giant Meta Platforms (META) released its Q2 2024 earnings report (April to June 2024) after the US market closed on July 31, beating market expectations for both revenue and profits.

Meta Platforms (META) Q2 2024 Financial Results Release

• Revenues: $39.071B (YoY +22%)
• EPS: $5.16 (YoY +73%)
• Operating Income: $14.847B (YoY +58%)
• Net Income: $13.465B (YoY +72.89%)
• Family of Apps Revenues (FoA): $38.718B (YoY +22%)
• Reality Labs Revenues (RL): $353M (YoY +28%)

Total costs and expenses for Q2 increased 7% YoY to $24.22B, primarily driven by significant increases in operating costs and R&D expenses, partially offset by decreases in marketing and administrative expenses. All expense items as a percentage of revenue were lower than the same period last year.

The Family of Apps segment saw operating profit jump 47% YoY to $19.335B, while the Reality Labs division’s losses widened from $3.74B to $4.488B YoY. Meta had previously forecast that Reality Labs’ losses would significantly expand this year. Capital expenditure for Q2 came in at $8.47B, well above last year’s $6.35B but below analyst expectations of $9.51B.

H1 capital expenditure reached $15.19B, surpassing the $13.44B from last year’s period.

Advertising

Core ad revenue in the Family of Apps segment hit $38.329B, up 22% YoY, though growth decelerated from the previous quarter. The main growth drivers were e-commerce, followed by gaming, entertainment, and media. Ad impression growth slowed to 10% YoY, marking the fourth consecutive quarter of deceleration. However, average ad prices accelerated for the third straight quarter, rising 10% YoY, indicating improved ad monetization efficiency.

Ad impressions grew 10% YoY across all regions, but the growth rate notably slowed from the previous quarter, in line with Meta’s earlier warning about potential headwinds from higher comparables. The Asia-Pacific region remained the primary growth engine, with ad impressions surging 15%. Average ad prices increased 10% YoY across all regions, with growth rates exceeding those of the previous quarter, reflecting robust ad demand and improved conversion rates. This may indicate that the benefits of incorporating AI into ad tech are starting to materialize, partially offset by increased ad volume in lower-priced regions.

User

Daily Active People (DAP) for the Family of Apps reached 3.27 billion in Q2, up 6.5% YoY, broadly aligned with Wall Street expectations and showing steady sequential growth. However, this quarter’s net DAP addition was slightly below the average of recent quarters, which bears watching. Average Revenue Per Person (ARPP) for the Family of Apps hit $11.89, up 14% YoY, surpassing the previous quarter’s $11.2 to reach the second-highest level in history.

Meta Platforms (META) Q2 2024 Earnings Call Highlights

The company raised its full-year capital expenditure guidance and projected a significant increase in capex for 2025.

Hardware

Ray-Ban Meta Smart Glasses have exceeded internal expectations, partly due to AI integration. The product is currently facing supply constraints as Meta works to expand production capacity.

Meta Quest 3 sales have also surpassed Meta’s initial projections.

Losses in the Metaverse business have increased, mainly due to higher personnel costs and increased inventory costs for Quest 3. Meta expects Metaverse losses to continue expanding as they work to develop and scale the entire ecosystem.

Social Media

Facebook is seeing good growth among young users in the US, partly thanks to features like Groups and Marketplace. Facebook is rolling out a unified video recommendation system that integrates both long-form and short-form video. The company believes the positive impact of this change will surpass the effect of switching the recommendation system from CPU-based algorithms to GPU AI computing.

Instagram Reels engagement continues to rise, with over half of recommendations now coming from original content.

WhatsApp has surpassed 100 million monthly active users in the US. Zuckerberg views WhatsApp’s positive development in the US as crucial, with enormous business potential.

Threads is approaching 200 million monthly active users, and Meta believes the product has the potential to become a significant social app. However, Zuckerberg noted that it would take several years to grow into a platform with 1 billion users.

Advertising

AI will continue to enhance Meta’s ad services, making it easier and more effective for advertisers to run online campaigns while strengthening their ties to Meta’s platforms. Meta believes that generative AI will become increasingly important for ad creation.

Meta sees more advertising opportunities in short-form video compared to long-form content. The company is continuously optimizing ad insertion methods to drive ad revenue growth without increasing ad volume.

The growth in Meta’s ad impressions is primarily driven by video content, especially short-form video.

Meta views global ad market demand as quite healthy, but expects its ad business growth rate to slow in Q3, mainly due to tough year-over-year comparables.

Excluding currency effects, Meta’s ad revenue grew 23% in real terms this quarter.

Llama

Llama 3.1 marks a key turning point where open-source models are formally catching up to closed models. Having the best large language models will help Meta build the best social and advertising experiences.

Llama 4 is expected to require ten times the training compute of Llama 3.

Zuckerberg stated that making Llama models open-source and becoming the best AI infrastructure is most beneficial for Meta, as it allows them to have the best AI models to enhance their products, which wouldn’t be achievable if Llama were closed-source.

AI

Meta’s AI capital expenditure investments are divided into two main areas: core AI (for content recommendation systems and advertising) and generative AI and advanced research. For core AI investments, Meta clearly sees expected returns. Returns from generative AI may take longer to materialize, but Meta is working to integrate these R&D results with existing products.

Regarding AI capex investments, Zuckerberg’s view aligns with other tech giants: it’s better to risk overbuilding than to risk building too late. Even with increased investments, Meta remains committed to ongoing operational efficiency optimization across the entire company.

Meta expects Meta AI to become the most widely used AI assistant globally by the end of the year. India is currently the largest market for Meta AI usage, which is related to WhatsApp’s strong performance in the country.

Mark Zuckerberg believes that over the next two years, the AI investments that will contribute most to performance will be the revenue growth driven by AI improvements to Meta’s products, i.e., core AI.

For investments in generative AI and advanced models, Zuckerberg sees this as similar to many of Meta’s products, with a longer investment cycle that only becomes meaningful when the business expands to a large enough scale to monetize and generate revenue. Meta’s past products have followed this development trajectory. However, all early signals give Meta confidence in this part of the investment.

Zuckerberg believes that even if large language models stop progressing, they still have a lot of work to do to optimize existing products. But he believes large language models will continue to improve, and Meta’s product planning is based on this assumption.

Forecast for Q3 2024

Q3 revenue is expected to be $38.5-41 billion, representing year-over-year growth of approximately 12-20%.

Review and Analysis

Strengths and Opportunities:

• Facebook regaining favor among young users in North America, with steady growth in overall Family of Apps users
• WhatsApp beginning to build monetization capabilities, gaining traction in the US market
• Strong market response to Ray-Ban Meta smart glasses
• Excellent sales performance of Meta Quest 3, with competitor Apple Vision Pro underperforming expectations
• AI continuing to boost social platform usage and ad monetization capabilities
• Increased AI capital expenditure to ensure sufficient future computing power
• Llama 3.1 becoming a top-tier large language model
• Potential opportunities for Meta platforms as TikTok faces potential ban issues in the US

Weaknesses and Threats:

• Metaverse business continues to generate substantial losses
• Meta faces ongoing government regulatory issues in global markets
• Generative AI investment expenditures may take years to see returns
• Growth from short-form video usage is beginning to slow down

Advertising

While Meta’s ad revenue growth slowed this quarter, this was primarily due to tough year-over-year comparables. Compared to competitors, Meta’s performance was actually quite strong, alleviating concerns about a broader slowdown in the advertising market.

The rise in average ad prices this quarter, coupled with ad impression growth falling to its lowest point in two years, may indicate that the initial explosive growth driven by short video and AI content recommendation engines has stabilized, entering a more steady organic growth phase.

User

The return of young users to Facebook in North America may reflect an interesting phenomenon: the new generation of young people, in search of new platforms, are finding that this “veteran” platform better meets their needs.

Threads approaching 200 million users is undoubtedly good news, but reaching the goal of 1 billion monthly active users still faces challenges. Currently, Threads does meet the demand for a pure text-based social network among some young IG generation users, but its long-term development potential remains to be seen.

WhatsApp’s growth in the US market brings important positive news for Meta’s non-advertising business. This could accelerate Meta’s exploration of WhatsApp monetization strategies.

AI

The launch of Llama 3.1 marks Meta’s entry into the first tier of AI technology. Meta’s continued investment in Llama proves to be the right strategy, with the open-source community’s contributions enabling Llama to compete with closed-source top-tier models.

Can Meta AI become the most widely used AI assistant globally by year-end, as Zuckerberg claims? Meta certainly has the conditions to achieve this goal, but the key lies in whether they can make their chatbot as user-friendly as ChatGPT or even better.

Regarding AI capital expenditure, Meta has adopted an attitude of “better to overpay than miss out.” They emphasize having enough flexibility to ensure these AI investments won’t be wasted. In fact, flexibility in application becomes the strongest backing for tech giants to invest boldly.

Hardware

Ray-Ban Meta smart glasses may currently be underestimated by the market. Meta is expected to take more aggressive action on this product in the second half of the year, which could become an important driver of Meta’s future growth.

Quest 3 sales performance is slightly better than Quest 2’s performance at launch. Although facing competition from Apple Vision Pro, Quest 3 sales volume may be 9 to 10 times higher. This lays a solid foundation for Meta’s metaverse ecosystem.

Conclusion

META is quietly entering the ranks of AI leaders. More importantly, META’s flexibility in capital investment is on par with other tech giants. Their capital expenditure can be shifted to core AI applications at any time.

With advertising business continuing to generate substantial revenue, META has enough confidence to continue investing in AI and the Metaverse. While the prospects for the latter remain unclear, AI investment is crucial for META. Although current AI investments may seem expensive, they will lay the foundation for the company’s long-term development, ensuring META maintains competitiveness in the rapidly changing tech landscape.

Going forward, how META balances short-term profitability with long-term investments, and how it maintains competitive advantages in emerging fields such as AI and the Metaverse, will be key points to watch.