Meta's AI Ambitions Tank Stock Amidst Metaverse Woes

Meta (META) shares plunged 15% in after-hours trading due to a downgraded revenue outlook for Q2, coupled with aggressive spending plans for AI initiatives. Despite exceeding revenue expectations in Q1, Meta anticipates rising expenses and continued losses in its metaverse division, Reality Labs. The company's focus on AI investments, including the development of its Llama 3 AI model, aims to support long-term growth but has raised concerns among investors.

Meta's Ambitious AI Plans Drive Stock Plummet Amidst Metaverse Losses

In a significant market development, Meta Platforms, the parent company of Facebook, Instagram, and WhatsApp, has witnessed a colossal 15% drop in its stock value during after-hours trading. This dramatic decline follows the release of its first-quarter earnings report, which unveiled a disappointing revenue outlook for Q2 and unveiled aggressive investment plans in artificial intelligence (AI).

Meta's Chief Financial Officer, Susan Li, reported during the April 24th earnings call that revenue guidance for the second quarter is anticipated to range between $36.5 billion and $39 billion. This projection falls short of the $38.3 billion estimate anticipated by Wall Street analysts.

Furthermore, Li indicated that expenses are expected to increase significantly to a range of $96 billion to $99 billion, a rise from the previous estimate of $94 billion to $99 billion, primarily attributed to "higher infrastructure and legal costs."

The company's full-year 2024 capital expenditures have also been revised upwards, with the upper limit now set at $40 billion, compared to the previous estimate of $37 billion. This move reflects Meta's "aggressive investment" strategy to support its ambitious AI research and product development initiatives.

Despite these setbacks, Meta reported solid financial results for the first quarter, with revenues reaching $36.46 billion, marking a robust 27% year-over-year (YOY) increase. This surpassed Wall Street analysts' Zacks estimate of $36.28 billion by 0.48%. Additionally, earnings per share doubled YOY to $4.71, outperforming estimates of $4.32 per share.

However, the company's metaverse-building division, Reality Labs, continues to incur significant losses. In Q1, the division lost $3.85 billion, although this represents a slight improvement from the nearly $4 billion lost during the first quarter of 2023. Meta anticipates that these losses will continue to escalate YOY as it supports the division's product development efforts.

CEO Mark Zuckerberg emphasized during the earnings call that "an increasing amount of our Reality Labs work is going toward serving our AI efforts." He anticipated a "multi-year investment cycle" before Meta could fully scale its AI businesses.

Zuckerberg further elaborated that "building the leading AI will also be a larger undertaking than the other experiences we've added to our apps. This is likely going to take several years."

In response to these announcements, Meta shares experienced a substantial decline of 15.4% after-hours on April 24th, reaching $417.22 after closing the day down 0.5% at $493.50. The stock briefly touched a low of $402.98 before recovering slightly.

Despite the recent setback, Meta remains up 42.5% year-to-date, having reached an all-time high of $527.34 earlier this month on April 5th.

On April 18th, Meta debuted its Llama 3 AI model, which was incorporated into the Meta AI chatbot accessible across Facebook, Instagram, WhatsApp, and Facebook Messenger. While reports have emerged of bizarre interactions generated by the chatbot, Meta claims that human evaluators ranked Llama 3 higher than competing models, including OpenAI's ChatGPT-3.5.