- Wall Street beat in Q2
- Higher capex incoming as Meta seeds AI soil
- $590 target price slapped on stock
All gardeners know you plant seeds today to reap a harvest tomorrow and it’s what Facebook-owner Meta Platforms (META:NASDAQ) is doing with AI (artificial intelligence). Yes, it means higher capex now, but the rewards down the line could be considerable.
Investors seems to understand this, which is why the stock is primed for a near-7% surge when Wall Street reopens later today, following second quarter earnings overnight despite the company’s comments that it ‘expects infrastructure costs will be a significant driver of expense growth next year as we recognize depreciation and operating costs associated with our expanded infrastructure footprint.’
MORE AI INVESTMENT INCOMING
Capital expenditure, or capex for short, was $8.47 billion in Q2, up sharply from $6.72 billion in Q1. ‘We anticipate our full-year 2024 capital expenditures will be in the range of $37 billion to $40 billion, updated from our prior range of $35 billion to $40 billion.
While we continue to refine our plans for next year, we currently expect significant capital expenditures growth in 2025 as we invest to support our artificial intelligence research and product development efforts.’
Sound familiar? It’s not far off what Microsoft (MSFT:NASDAQ) said the previous day, yet its shares fell.
Part of that can be put down to the two stock’s relative valuations – Microsoft on a 12-month rolling PE (price to earnings) multiple of over 30 versus Meta’s 22, according to Stockopedia data.
Meta is also returning vast sums to shareholders, with buybacks worth $6.32 billion of Class A stock and dividends of $1.27 billion in Q2.
For the three months ended 30 June 2024, Meta reported earnings of $5.16 per share on revenue of $39.07 billion, beating estimates of $4.7 and $38.26 billion, respectively.
It might be tricky to earn money from AI for many companies this early in the transformation, but as Meta (and Microsoft) clearly show, some are already making hay in the sun.
CONFIDENT BIG BET ON AN AI FUTURE
Can this continue? Meta says yes and says it loudly with confidence. For Q3 the company guided for revenue in the range of $38.5 billion to $41 billion, or $39.75 billion at the midpoint, ahead of Wall Street estimates of $39.1 billion.
‘We believe Meta’s Q2 print reinforced the core business is seeing AI returns today while AI assistants and agents create returns over the medium term’, analysts at KeyBanc Capital Markets said.
‘As AI creates more efficiencies for merchants around the world, we believe this can drive further share gains and support consistent +10% annual advertising revenue growth.’
Stifel analysts chimed in, lifting their target price on Meta shares from $550 to $590, noting that the elevated lower end of the capex outlook was the ‘only real wrinkle’ from the print.
‘It’s hard to deny the increase in capex is material, but we believe Meta’s AI initiatives are paying off already (better engagement, advertiser tools driving incremental budgets), with more to come’, Stifel wrote.
