Meta's AI reset drives stock higher following earnings

Meta Q4 2023 Earnings Analysis & Future Outlook

Key Concepts:

• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment.
• EPS (Earnings Per Share): A company's profit allocated to each outstanding share of common stock.
• Generative AI: Artificial intelligence capable of generating new content, such as text, images, or code.
• LLM (Large Language Model): A type of AI model trained on massive amounts of text data, enabling it to understand and generate human-like text.
• Best in Breed: Identifying companies that are leaders in their respective industries, demonstrating superior performance and innovation.
• B2C (Business-to-Consumer): A business model where companies sell products or services directly to individual consumers.
• Revenue Growth: The increase in a company's sales over a specific period.
• Operating Profit: Profit earned from a company’s core business operations.
• Valuation: The process of determining the economic worth of an asset or company.
• Arbitrage: Exploiting price differences in different markets to generate a profit.

I. Q4 2023 Financial Results & Initial Market Reaction

Meta’s Q4 2023 earnings exceeded expectations, reporting an EPS of $8.88 and topline revenue of $59.89 billion, surpassing the consensus estimate of $58.42 billion. Ad revenue reached $58.14 billion, exceeding the street’s expectation of $56.6 billion. Despite these positive results, the stock initially dropped nearly 3% in after-hours trading, driven by concerns over increased spending. Prior to the earnings release, the stock was down approximately 10% since the previous earnings report in October and flat over the past 12 months. However, the stock recovered and edged higher during the discussion.

II. Increased Spending & the “AI Reset”

A significant aspect of the earnings report was Meta’s substantial increase in planned spending. The company anticipates spending over $100 billion in fiscal year 2026, a significant jump from the $72 billion spent in the last year (nearly doubling the 2025 spend). This increased investment is largely attributed to an “AI reset” within the company. Zuckerberg acknowledged a setback with the Llama 4 project (delayed from an April release with no current timeline) and a broader refocus on AI integration. The spending is directed towards hiring AI talent and building data centers to support large language models (LLMs) and generative AI. The goal is to integrate these technologies into algorithms to enhance user engagement (e.g., keeping users on Instagram longer) and improve ad targeting.

III. Analyst & Investor Perspectives

Despite the increased spending, analysts remain largely bullish on Meta, with over 90% issuing a “buy” rating. Arguments supporting this positive outlook include:

• Industry-Leading Revenue Growth: Meta demonstrates strong revenue growth compared to its peers.
• Scale Advantages & Engagement: The company benefits from its massive user base and high levels of user engagement.
• Attractive Risk-Reward: Analysts believe the potential returns outweigh the risks associated with the increased spending.

However, concerns persist regarding the return on investment (ROI) for the substantial capital outlays. Investors are questioning where the benefits of the AI investments will materialize.

IV. “Best in Breed” Argument & Meta’s Competitive Position

Adam Johnson, portfolio manager at Bullseye American Ingenuity Fund, strongly advocates for owning Meta, categorizing it as a “best in breed” company. He defines “best in breed” as companies that dominate their respective industries. Meta’s key strengths include:

• Unmatched Reach: Reaching 2.2 billion people daily, comparable only to Google (in search, a different domain).
• Monetization of All Aspects: Successfully monetizing various platforms, including WhatsApp, which has become a primary B2C communication channel (powered by bots and generating revenue).
• New Revenue Streams: Generating revenue from ads on Reels, a recently launched feature.

Johnson argues that Meta’s ability to grow at 20-30% annually at scale justifies its valuation, especially when compared to the S&P 500’s slower growth rate.

V. Long-Term Growth & Valuation

Scott, another analyst, echoed the sentiment that the market initially reacted negatively to the increased spending because expectations had already risen throughout the quarter. He emphasized that Meta’s revenue growth exceeded expectations by 300 basis points, with a projected 30% revenue growth for Q1 2026. He believes the spending is justified given the company’s growth trajectory and its focus on building for the next 10-15 years.

Meta currently trades at 18 times forward earnings, considered relatively cheap given its growth rate. The company is demonstrating early signs of AI monetization in its results, and analysts anticipate leverage will return to the business model in 2027-2028.

VI. Narrative & Story Problem

A point raised by Josh Brown (referenced by the host) suggests Meta has a “story problem” or a “narrative problem.” While the company is performing well, it has numerous initiatives (“balls in the air”) and lacks a clear, concise AI strategy. Improving clarity around its AI vision could benefit the stock’s narrative and potentially boost investor confidence.

VII. Risks & Considerations

Potential risks identified by Scott include:

• Spending in Non-Growth Areas: If Meta invests in areas that don’t stimulate growth, leading to decelerating revenue.
• Macroeconomic Factors: External economic conditions could impact Meta’s performance.

VIII. Readthrough to Alphabet & Advertising Industry

The positive results from Meta validate the strength of the advertising industry, providing a positive readthrough for Alphabet (Google), whose earnings are upcoming. While Alphabet’s valuation is higher, Meta’s performance suggests continued strength in the digital advertising market.

Conclusion:

Meta’s Q4 2023 earnings demonstrate strong financial performance and a commitment to long-term growth through significant investment in AI. While increased spending initially caused market concern, analysts remain largely bullish, citing the company’s industry leadership, scale advantages, and successful monetization strategies. The key takeaway is that Meta is prioritizing long-term value creation over short-term quarterly results, and investors who share this perspective are likely to benefit from the company’s continued growth. Addressing the narrative around its AI strategy could further enhance investor confidence.