Source: Hard AI Author: Zhang Yifan On July 31, the financial report for the second quarter of 2024 will be released. Citigroup predicts that this quarter, Meta may achieve double growth in revenue and operating profit. Hard AI will discuss the issues that the market is most concerned about and most affect Meta's valuation based on Citigroup's report.
Citigroup predicts that, benefiting from AI-driven technology, Q2 Meta may achieve double growth in revenue and operating profit, and capital expenditure will increase further to 9.6 billion US dollars, a MoM growth of 43.3%.
On July 31,$Meta Platforms (META.US)$Based on Citigroup's report, Hard AI will discuss the issues that the market is most concerned about and most affect Meta's valuation, as the financial report for the second quarter of 2024 will be released.
1. Why is revenue growth expected to be strong?
1) AI-driven user growth: Market data shows that driven by AI, the number of Threads and Facebook users increased in the second quarter. As of May, the number of 18-29 year-old users of Facebook in the United States and Canada exceeded 40 million, reaching its highest level in three years. At the same time, the monthly active users of Threads in May also reached 175 million, an increase of 25 million compared to the previous month. The number of users can often better attract advertisers, ultimately achieving revenue growth for Meta.
2) Rapid growth of Reels: According to Citigroup's survey, Reels' ad loading volume in the second quarter reached 21.5%, an increase of 1.5 percentage points from the previous quarter. On average, there are 11 ads displayed in every 50 Reels videos. Citigroup predicts that the growth of ad exposure will enable Reels to continue its growth trend in this quarter and achieve a month-on-month growth (see figure below).
3) Strong demand in the advertising market: Google's search ad revenue in Q2 2014 increased by 14% year-on-year, with retail and financial services being the main drivers, reflecting the strong demand in the retail and financial services advertising markets in the second quarter. Citigroup speculates that Meta, which is also mainly focused on retail, will also benefit.
4) AI technology upgrades: Meta released Llama 3.1 in the second quarter, with the number of parameters increasing significantly to 405 billion, far exceeding the previous generation of 70 billion. After Meta's business is connected to Llama 3.1, it will obtain better AI empowerment, which will help to attract more users and advertisers.
2. Why does the operating margin increase?
1) Continuous departmental restructuring and personnel optimization: In the second quarter, the company restructured and cost-cutting measures were taken in the Reality Labs department, while recruitment remained at historic lows. Citigroup expects that the operating profit margin in Q2 will increase by 1.4% compared to the previous quarter.
It is worth noting that personnel optimization may result in a large one-time expense (compensation fees) for the company. In addition, although the expenditure of the Reality Labs department has been reduced, the expenditure of the AI business may continue to rise. Citigroup predicts that capital expenditures for Q2 2014 will reach 9.6 billion US dollars, an increase of 43.3% month-on-month. The increase in capital expenditures may cause the operating profit margin to decrease.
In addition, when facing the regulatory review of anti-monopoly, data security, and privacy policy, the company may also incur large one-time expenses (legal fees).
3. What are the risks for the company?
1) Risk of privacy policy: Apple's privacy policy update may restrict the scope of Meta's data collection, thereby negatively affecting Meta's advertising business.
2) Risk of competition from competitors: TikTok and other short video platforms may pose a threat to Meta's business; Sensor Tower data shows that although the number of Facebook and Instagram users increased year-on-year in the second quarter, it slightly decreased month-on-month.
4. Citigroup's forecast
Based on the above analysis, Citigroup predicts that Meta's total revenue in Q2 2014 will reach $38.5 billion, an increase of 20.2% year-on-year; operating profit will be $15.1 billion, and the operating profit margin will be 39.4%, higher than the market's generally expected $14.4 billion; capital expenditures will be $9.6 billion, slightly higher than the market's generally expected $9.4 billion.
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