Kudos to Facebook parent Meta Platforms (META +0.65%) for topping last quarter's earnings estimates. But it's a dubious win. Profits themselves are still dwindling because the company is spending a fortune on promoting and improving its advertising platform. It's not clear when -- or even if -- Meta will be able to rein in its burgeoning expenses.
The bulls are taking a victory lap anyway, sending shares higher to the tune of 14% on Thursday following Wednesday's post-close release of the company's first-quarter numbers. In fact, Meta shares reached a new 52-week high this week.
Investors may want to use this recent strength as an exit opportunity, though, and consider whether or not this company can maintain its feebly rekindled sales growth without spending more and more to drive it.
The rest of the Meta Platforms story
There's no denying there are some bright spots in Meta's first fiscal quarter of the year. The top line of $28.6 billion was up 3% year over year, for instance, versus Wall Street's estimates of $27.7 billion. It was the first year-over-year revenue growth Meta has been able to muster since the first quarter of last year. Per-share earnings of $2.20 also topped the consensus of $2.02.
Sales guidance for the quarter currently underway was also better than expected, with the company forecasting a top line of somewhere between $29.5 billion and $32 billion. Not bad.
One data nugget that's not being particularly well touted, however, is the fact that Meta's earnings actually fell year over year last quarter -- again. Q1's net income of $5.7 billion is 24% less than the bottom line from the first quarter of 2022.
Image source: Meta Platforms' Q1 2023 earnings conference call slide deck.
Heavy, heavy spending is the culprit. The graphic below puts things in perspective. While relatively lower from Q4 levels overall, Meta's single biggest first-quarter expense -- research and development -- actually grew as a percentage of quarterly sales. It's been trending higher for several quarters now, in fact. Meanwhile, the basic cost of revenue also remains above long-term norms.
Image source: Meta Platforms' Q1 2023 earnings conference call slide deck.
Do know that some of last quarter's expense growth reflects charges linked to a consolidation of facilities and related severance expenses. Much of the persistent expense increase seen over the course of the past three quarters, however, are investments. Namely, Meta continues to work on its metaverse technology and its artificial intelligence capabilities. CEO Mark Zuckerberg even commented during the latest earnings conference call:
Our AI work is also improving monetization. Reels monetization efficiency is up over 30% on Instagram and over 40% on Facebook quarter over quarter. Daily revenue from Advantage+ Shopping Campaigns is up 7x in the last six months.
This may well be the case. As for overall beneficial impact, though, last quarter's year-over-year sales growth of 3% isn't exactly game-changing in light of the sort of money Meta's been shelling out of late.
And that's not the only important, related nuance to the troubling picture. User growth is concerning. While Meta did sequentially add 60 million daily users to its services last quarter, most of that growth came from the Asia-Pacific market or the "rest of the world" -- not Europe, Canada, or the U.S. Those two markets experience the lowest ARPU (average revenue per user) figures among all the ones Meta serves.
And in both of those cases, ARPU figures have been essentially stagnant since the second quarter of last year. For that matter, per-user revenue isn't exactly growing in a big way in Meta's more lucrative markets either. Connect the dots. Meta is losing steam -- and in more ways than one.
Image source: Meta Platforms' Q1 2023 earnings conference call slide deck.
Assume more of the same is in store
An existential crisis? Hardly. A company has to spend money to make money. Meta's payoff may well be on the horizon. In this particular case, though, the payoff may be in the distant future if on the horizon at all. As Zuckerberg also explained during the Q1 call:
[AI infrastructure] has been the main driver of our increased capex spending over the past couple of years. At this point, we're no longer behind in building out our AI infrastructure, and to the contrary we now have the capacity to do leading work in this space at scale.
He adds, however, that "as these new models and use cases continue scaling, we're going to need to continue investing in infrastructure, although we'll have a better idea of the trajectory of that investment later in the year once we can gauge usage of some of the new products that we'll launch."
Translation? Meta doesn't seem to know exactly how much it will need to spend on R&D for the foreseeable future. This expense could be dialed back. Or it could also continue to grow, and continue chewing into profits.
Own Meta if you must. The post-earnings surge, however, is an opportunity to get out of pricey shares of a slowing-growth company that's raising more questions than it's answering. Uncertainty rarely buoys a stock's price.
