Meta Platforms Inc (META) Com USD0.000006

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Meta reported first-quarter revenue of $42.3bn ($41.4bn expected), up 19% when ignoring currency moves. Operating profit was up 27% to $17.6bn, significantly better than expected on good cost control, and margins rose from 38% to 41%.

The number of people using at least one of Meta’s apps on a daily basis rose 6% to 3.43bn. Average price per ad rose 10%.

Free cash flow fell 18% to $10.3bn, largely due to a doubling of capital expenditure (capex) to $13.7bn as AI investment ramps up. There was net cash, including leases, of $20.7bn.

Second-quarter revenue is expected in the range of $42.5-45.5bn, and capex guidance for the full-year has been raised to $64-72bn.

The shares were up 5.1% in after-hours trading.

Our view

Meta comfortably beat first-quarter expectations, but the real focus was on the outlook and whether tariff-driven uncertainty would materially dent ad revenue. The short answer: it isn’t.

Guidance looked strong and Meta struck a confident tone, banking on its ability navigate the uncertainty with AI improvements to the core business and new products. China is an important region for Meta and changes to import rules mean companies are pulling back on US ad spend. Some is simply shifting to international markets, and we think Meta can cover any lost revenue from elsewhere.

Taking a step back, recent changes at Meta have been profound. Since 2022, revenue has grown over 50% while costs have been kept in check. This period of getting lean is what’s enabled Meta to go all guns blazing on the AI opportunities laid out before it.

Mark Zuckerberg has made it clear he’d rather overspend now than risk losing Meta’s leadership. We think that’s the right call, but it carries risks. Building and training AI models is enormously expensive, and while the impact on profits is spread over time, margins will come under pressure if revenue doesn’t keep pace.

There’s tangible evidence the core advertising business is already benefiting from AI. Advertising growth comes from both price and volume. Meta’s scale and expanding user base help drive volume.

The price side depends on advertisers feeling they’re getting more bang for their buck. That’s where AI comes in - optimising ad targeting, engagement, and efficiency. We’ve heard anecdotes about these tools’ effectiveness, but seeing price as an ongoing growth driver, despite a softer macro environment, suggests they’re delivering real value to Meta’s customers.

Meta splits AI into two categories. Core AI supports user engagement and ad performance. Then there’s generative AI - the more speculative side - such as Meta AI, the large language model embedded in its apps. These are in much earlier stages and, along with continued investment in Metaverse products, represent the biggest risks.

We see Meta as well placed to drive AI-related growth and continue its dominance in the ad and social networking world. This version of Meta looks much better placed to handle a challenging ad landscape and we’re seeing evidence that the best-in-class names are holding up relatively well. There are no guarantees, and with mammoth investment going into AI, there’s a massive amount of pressure to deliver.

Environmental, social and governance (ESG) risk

The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.

According to Sustainalytics, Meta’s overall management of material ESG issues is average.

Meta's structure limits the power of minority shareholders in company decisions. While the company’s privacy committee oversees its compliance with a significant 2019 settlement, Meta still faces ongoing lawsuits and fines for privacy issues, pointing to management gaps.

We would specifically flag a recent EU decision that certain pricing models are not compliant with regulations and, while Meta is appealing, modifications to comply could impact the user experience in Europe.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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