Meta's Q3 Earnings Beat Estimates: AI Boosts Revenue Growth, But Costs Remain a Concern

Meta's Q3 Earnings Beat Estimates: AI Boosts Revenue Growth, But Costs Remain a ConcernOctober 31: Facebook parent company Meta reported better-than-expected earnings for the third quarter ended Sept. 30, with revenue rising 19% year-over-year

Meta's Q3 Earnings Beat Estimates: AI Boosts Revenue Growth, But Costs Remain a Concern

October 31: Facebook parent company Meta reported better-than-expected earnings for the third quarter ended Sept. 30, with revenue rising 19% year-over-year. The company also warned of increased costs associated with its AI investments.

Meta's revenue came in at $40.59 billion, beating analysts' estimates of $40.29 billion. Net income rose 35% to $15.69 billion, and earnings per share were $6.03, surpassing forecasts of $5.25.

Meta projected fourth-quarter revenue between $45 billion and $48 billion, compared to analysts' expectation of $46.31 billion.

The beat on both revenue and profits was driven in part by rising revenue from AI-powered advertising, but the company warned that spending on AI-related infrastructure would "accelerate meaningfully." These results left investors with mixed feelings about whether digital ad revenue from Meta's core social media business can continue to cover the hefty cost of its AI development.

Shares of Meta fell 2.2% in after-hours trading after closing the day down 0.25% at $591.80.

Meta reported that daily active users on its apps hit 3.29 billion in the third quarter, up 5% from a year earlier.

By segment, Meta's Family of Apps division reported $40.32 billion in revenue and $21.78 billion in operating profit. Advertising revenue came in at $39.89 billion, while other revenue was $4.34 billion.

Reality Labs, the division building virtual and augmented reality technologies, recorded $270 million in revenue and a $4.43 billion operating loss.

We had a good quarter driven by continued progress in AI across our apps and business, Meta founder and CEO Mark Zuckerberg said. Meta AI, Llama applications, and our AI-powered glasses are all gaining momentum.

Meta's third-quarter revenue was slightly above analysts' expectations, growing at 19% year-over-year but slower than the 22% growth seen in the previous quarter. Advertising revenue accounted for 96% of revenue in the quarter.

"Meta's business is firing on all cylinders, with AI clearly driving growth," said Jesse Cohen, an analyst at Investing.com. "However, investors seem to be somewhat disappointed by the company's outlook and the rising cost of developing AI capabilities."

Zuckerberg has doubled down on AI, with the company boasting the most widely used AI assistant globally, while consistently increasing spending. Unlike cloud service providers, Meta doesn't expect these investments to pay off immediately, making it more vulnerable to investor scrutiny over its cost management.

In the third quarter, Meta exercised control over its costs, with total expenses at $23.2 billion, including $9.2 billion in capital expenditures. The company expects to see some improvement in spending this year, narrowing its full-year spending forecast range to $96 billion to $98 billion.

"They've really taken costs down to a new level, and AI is actually increasing profits," said Justin DuMouchelle, portfolio manager at New York-based CerityPartners, a Meta platform investor.

However, Meta warned that "infrastructure spending growth will accelerate meaningfully next year as we see both higher depreciation expenses and continued operational expense growth."

AI advancements have become a central theme in earnings reports from the tech giants this week. Microsoft beat revenue expectations on the back of the AI boom, and Alphabet, Google's parent company, also reported strong results. Amazon and Apple are expected to report earnings Thursday.

On Tuesday, Alphabet, Google's parent company, reported a 15% increase in revenue for the latest quarter, but ad revenue growth at its search and YouTube businesses slowed down.

Data from SensorTower, a market research firm, revealed that Chinese e-commerce companies Shein and Temu, two of Meta and Google's largest advertising customers, slowed their U.S. advertising spending in the third quarter compared to a year earlier.

Other tech companies, such as Reddit and Snap, also witnessed growth in their digital advertising businesses for the latest quarter. Both social media platforms, which rely heavily on online ads for revenue, said their overall sales rose 68% and 14%, respectively, with investments in AI helping to improve ad services. Reddit said that thousands of new advertisers joined its platform each quarter, while Snap said that its number of active advertisers more than doubled year-over-year in the third quarter.

Meta said its daily active users on its Facebook, Instagram, Messenger, and WhatsApp apps totaled 3.29 billion in the quarter, up 5% from a year earlier and less than 1% from the second quarter.

Earlier this month, Meta rolled out its free generative AI, Meta AI, in more countries, including the UK and Brazil. The company said Meta AI would be available in 43 countries and support 12 languages.

Last month, Meta also held its annual developer and hardware conference, announcing partnerships with celebrity voices like Awkwafina for its new AI assistant. The company reportedly paid millions of dollars in likeness fees to use these stars' personas.

At the event, dubbed MetaConnect, the company also showcased its first augmented reality glasses prototype, a new mixed-reality Quest headset that launched earlier this month, and new features for Ray-Ban smart glasses.

Last month, Meta started automatically setting Instagram accounts belonging to teens to private and applying restrictive settings, following company adjustments to teen accounts announced earlier this year. This move came in response to years of industry scrutiny over Meta's alleged child safety issues.

Meta said that this move would likely cause the company to lose a significant percentage of teen users and engagement but that it would be making further moves next year, using AI to detect children who are lying about their ages.

Over the past 12 months, Meta's stock price has nearly doubled, driven by the surge in ad-targeting capabilities enabled by breakthroughs in AI technology.