Meta Q1 - Soft outlook

The market is having a tough time working out the right price level for Meta Platforms shares. The social media giant (Instagram, Facebook, Messenger and WhatsApp) is run by one of the world's best CEOs, 39-year-old Mark Zuckerberg. They have about 3.6 billion users, which is more than 77% of those currently using the internet.

In September 2021 they were flying high, thanks to stay-at-home Covid boredom, and very strong ad sales. They changed the name of the company, from Facebook, and announced a plan to spend billions building metaverse applications. Investors were not impressed, and the overall tech market was weak, so the Meta share price collapsed, losing 75% of its value.

Since then, they've bounced back magnificently because they dumped the metaverse idea, redeployed their datacentres for AI services, improved their ad-serving algorithms, cut costs and initiated a divided. The share price tripled. Zuckerberg is good at pivoting.

They also enjoyed a huge share price surge in February 2024, after knock-out last quarter results. They hit an all-time earlier this month of $531.49 per share.
After the results released last week though, despite seemingly very strong sales and profit numbers, Meta Platforms had its worst trading day in 18 months, falling over 10%. Huh, what gives?

The problem seems to be that Meta is making even bigger investments in AI infrastructure than was anticipated. They plan to spend an extra $10 billion in 2024, mostly on more datacentres that run on lots of expensive Nvidia chips. Their latest large language model, called Llama 3, was released earlier this month. It is about as good as OpenAI's most advanced products, but is given away for free as open-source software.

Zuckerberg warned of years of aggressive spending before seeing a substantial return on AI. Here's a transcript of his key comments.

"I also expect to see a multiyear investment cycle before we fully scale Meta AI, business AIs, and more, into the profitable services. We've seen a lot of volatility in our stock during this phase of our product playbook, where we're investing and scaling a new product but aren't yet monetizing it. Historically, investing to build these new scaled experiences in our apps has been a very good long-term investment for us and for investors who have stuck with us,"

Our view is that we should buy quality businesses run by clever people and then wait for the profits to flow, and the market to place a higher value on their shares over time. Even after last week's collapse, Meta's share price is still up 28% year to date. We are happy to hold this one.