Why Meta’s costly AI vision looks more compelling than the metaverse

2024/04/29 Innoverview Read

Dive Brief:

  • Meta Platforms grew revenue 27% year-over-year in the first quarter to $36.46 billion, according to an earnings statement. The results beat expectations, with strong advertising fundamentals, though other aspects of the report set investors on edge. 

  • Advertising impressions delivered across Meta’s app ecosystem, which includes Facebook, Instagram and WhatsApp, increased 20% YoY. The average cost per ad ticked up 6% YoY, a reversal from prior quarters that signals strong advertiser demand.

  • Executives spent much of the earnings call outlining the company’s efforts in areas like generative artificial intelligence (AI) and the metaverse, two costly investments. Meta expects Q2 revenue in the range of $36.5 billion to $39 billion, below Wall Street’s expectations. 

Dive Insight:

Meta’s advertising business, which still accounts for the lion’s share of its revenue, had an impressive start to the year. Healthy advertiser demand led to ad pricing growth, while overall impressions jumped and revenue climbed 27%. 

The social media giant has recently seen a windfall as Chinese companies like Shein and Temu ramp up their outreach to U.S. consumers. Finance chief Susan Li stated that the Asia-Pacific region was Meta’s fastest-growing in relation to advertising in Q1, up 41% YoY.

Reels, a TikTok competitor, has continued to gain traction — it now makes up 50% of the time people spend on Instagram — and improve monetization efficiency. With a potential TikTok ban or sale looming, the short-form video portal could attract more ad budgets down the line, though Meta leadership said it was too early to tell what the impact would be. Threads, Meta’s answer to X, formerly Twitter, also looks promising with 150 million monthly active users.

That said, much of the Q1 earnings call centered on Meta’s future-facing bets, including money losing projects like the metaverse. Meta’s shares sharply dropped Wednesday as that discussion focus and a disappointing Q2 outlook proved off-putting to some investors. 

CEO Mark Zuckerberg outlined several ways Meta is putting AI to use, such as a new assistant called Meta AI (which has already stirred controversy), connected sunglasses, creator AIs and a large-language model called Llama 3. AI also increasingly underpins Meta’s advertising infrastructure through offerings like the Advantage+ suite of products and an ads-ranking system called Meta Lattice.

Those features have seen strong adoption from brands, executives said. But staying competitive on the AI front will involve hefty spending and it could take several years to realize a market-leading product, Zuckerberg cautioned, echoing his prior outlook on building the metaverse, a bridge between the real and virtual worlds. 

“Realistically, even with shifting many of our existing resources to focus on AI, we’ll still grow our investment envelope meaningfully before we make much revenue from some of these new products,” the CEO said on the investor call. 

The executive noted that there is strong monetization potential in AI, including in scaling up business messaging, implementing paid ads or content around AI and charging people more to access bigger models. That’s a more compelling roadmap at the moment than the one around the metaverse, an ambitious initiative that has consistently bled money. 

Reality Labs, the Meta division tasked with developing virtual reality tools, saw revenue increase 30% in Q1 on sales of its Quest headset but its operating loss stood at $3.8 billion. Enthusiasm for the metaverse as a concept has withered in the wake of AI, which remains a topic that excites consumers and investors. 

“The question remains whether Meta can contend in the AI race while maintaining a strong financial position,” said Mike Proulx, vice president and research director at Forrester, in emailed comments. “To do this, expect to see more ‘metaverse’ resources diverted from Reality Labs to Meta’s AI initiatives.”

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