Early Thursday morning peking time, the world's largest social media company $Meta Platforms (META.US)$ released its third-quarter financial results, with Q3 revenue of $40.589 billion, a 19% year-on-year increase, higher than the analyst's expected $40.25 billion; net income of $15.688 billion, a 35% year-on-year increase; adjusted EPS of $6.03, higher than the analyst's expected $5.25.

Despite the company's revenue and EPS exceeding market expectations, concerns about AI's excessive spending have cast a shadow over this technology giant.

Better than expected performance, but AI's high expenditure poses a hidden risk.

The better-than-expected performance seems to bring a ray of light to Meta Platforms, but behind this seemingly beautiful report, hidden dangers lurk.

As Meta's core profit business, Q3 advertising revenue reached $39.885 billion, while the company expects full-year capital expenditures to be between $38-40 billion in 2024. This has also raised doubts from some Wall Street analysts: Can Meta's advertising revenue continue to cover the costs of its large-scale AI development?

At the same time, meta platforms also warned that spending on AI-related infrastructure will "accelerate significantly" by 2025:

We realize that with the expansion of our infrastructure team, there will be higher growth in depreciation and operating expenses.

Since hitting a low of $88.09 in November 2022, meta platforms have rebounded strongly by over 570% with the help of the ai boom. Just two weeks ago, meta's stock price hit a record high, successfully surpassing $600. However, the current "massive cash burn" plan seems to have raised doubts among investors, causing meta's stock price to drop by over 2% today.

Investors have been cautious about Meta's huge spending in recent months. In the first quarter of this year, the company evaporated over $200 billion in market cap due to excessive spending expectations.

Jasmine Enberg, eMarketer's chief analyst, said, "Meta needs to demonstrate to the market that despite the expected increase in AI costs next year, the company can still afford these expenses. During this process, if there is any weakness in the core advertising business, investors may feel uneasy as they are still waiting for Meta to deliver greater returns in the AI field."

Meta CEO Mark Zuckerberg admitted during the earnings call that the news of Meta spending more on infrastructure expenses "may not be what investors want to hear in the near term," but he stated that the company will continue to invest. "I just think the opportunity here is really big."

Zuckerberg attributes the revenue growth to AI investments and reveals that over 1 million advertisers are using Meta's automated AI ad tool. Furthermore, Meta stated that the development of the AI chatbot assistant Meta AI is progressing rapidly, with over half a billion monthly active users currently. Perhaps this is also a reason investors are still hopeful.

EMarketer's chief analyst Jasmine Enberg mentioned that because the company's AI tools can show people more content that aligns with their interests, this means that even if user growth slows down, the company still has the ability to generate more revenue from users.

Meta's metaverse business is suffering from severe negative feedback and huge losses.

In addition to ai, another "burning project" of the company - Reality Labs, third-quarter revenue was only $0.27 billion, but a huge loss of $4.4 billion. Since 2020, Meta's metaverse business has accumulated operating losses exceeding $58 billion.

The business mainly profits through Quest VR devices and RayBan smart glasses. Meta CFO stated that Reality Labs is expected to significantly increase losses in 2024, as the company will continue to develop products and invest in expanding the ecosystem.

The ongoing losses have not deterred Meta's bets in the metaverse field. At Meta's annual developer conference in September, in addition to releasing the affordable Quest 3S headset, Zuckerberg also showcased the holographic AR glasses Orion, calling it "the most advanced glasses to date," a product that Meta has spent ten years building. The production cost of each pair of glasses is approximately $0.01 million. However, Orion is still a prototype product, with only about 1000 pairs produced and will not be officially on sale in the short term.

However, analyst Carolina Milanesi from the consumer technology research firm Creative Strategies pointed out that when it comes to ai, Meta may not be the first brand that comes to people's minds. This raises certain doubts about the logic of heavy investment in AR/VR, as it is uncertain when tangible results in increased revenue and profit improvement will be demonstrated.

Although this performance has exposed various issues with Meta, most Wall Street analysts still maintain a relatively optimistic attitude. After the performance release, Citigroup raised Meta's target price from $645 to $705, while Barclays raised its target price from $550 to $630. As of October 31, over 90% of analysts still maintain a "buy" rating on Meta, with an average target price of $637.36, representing over 7% upside from the current price.

Some investors liken Meta to climbers challenging the peak of ai, where a slight misstep could lead to a plunge into the abyss. However, we cannot deny Meta's spirit of boldly exploring unknown territories. Meta has already made some achievements in ai technology research and development, and its large user base and rich data resources are advantages that other companies do not have. Perhaps finding a perfect balance in the research and application of ai technology is what investors would prefer.

Editor/Lambor