Meta Platforms Inc (META) Com USD0.000006

Meta’s revenue rose 27% to $36.5bn in the first quarter, which was slightly better than expected, and driven by higher advertising revenue. Operating profit was up 91% to $13.8bn.

The number of people using at least one of Meta’s app on a daily basis rose 7% to 3.24bn.

The group generated free cashflow of $12.5bn in the quarter, compared to $6.9bn last year. There was net cash of $39.7bn as at the end of the quarter.

Meta has upgraded its capex target to $35-$40bn this year, as it expects to “aggressively” invest in its AI research and development ambitions.

The group also said it’s actively monitoring the regulatory landscape.

The shares fell 13.9% in pre-market trading.

Our view

If the market reaction to first quarter results taught us anything, it’s that for all Meta’s bold AI plans, it can’t afford to take its eye off the nucleus of the business – its core digital advertising activities.

That doesn’t mean ignoring AI, but it does mean that spending needs to be targeted and in-line with a clear strategic view. The ‘see what sticks’ method of years gone by won’t be tolerated by the investor base. Meta’s resources are vast, but not infinite, and its digital advertising market share needs defending at all costs, and that means being disciplined first, but in tandem with some moon shots in the background. The language around spending plans has become bolder once more, and this could be what’s spooked markets.

Substantial investment in AI does have the ability to hugely improve engagement with its platforms, and therefore the amount marketers are prepared to pay for ad space. The group has indeed surpassed expectations in a time when digital advertising uncertainty remains rife, so we’re not knocking progress.

The other grand plan - the Metaverse - is still churning away in the background - it's not been given up. And we continue to think there could be exciting times ahead, it's just difficult to predict when the good times might roll - and there are likely to be ups and downs along the way.

Looking further ahead, we see the biggest risk as regulatory, with Meta admitting it continues to monitor the landscape. Biden’s anti-tech stance could accelerate if he’s handed another term, with outcomes on a broad spectrum. One end could see verbal slaps on the wrist, the other extreme could be the forced breakup of conglomerates like Meta, if they’re deemed to have too much influence or are contributing to anticompetitive practice. The reality would likely be somewhere in the middle.

Meta generates bucket loads of free cash flow and the balance sheet is in good order, so it has the firepower to invest for growth and stomach ups and downs. The market will instead remain focussed on how well the group's managing the balancing act between margin growth and nurturing outside bets.

Meta remains a force to be reckoned with, and its scale can’t be overstated. But we’re disappointed to see Zuckerberg rowing back on the newfound, and well-received, focus on the core business quite so soon. The newly instated dividend does mean investors are being paid a little to wait and see how the AI plans pan out, but we’d argue that’s probably not enough.

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