AI helps Meta achieve record performance in Q4, while Q1 guidance is disappointing; "burning money" to cope with DeepSeek, this year's spending may increase by 60% | Earnings report insights

In the last quarter of last year, Meta's sales and profits reached record highs, reflecting the enhancement of digital advertising business through the application of artificial intelligence (AI) technology. The metaverse business, which includes Quest VR headsets and smart glasses, continued to incur losses, but the losses were slightly lower than expected.

In the face of challenges from China's new AI force DeepSeek and its cost-effective open-source models, Meta still plans to "burn money" this year to support the development of AI and its core business. However, the disappointing guidance for this quarter raises doubts about whether Meta's "cash cow" digital advertising can grow quickly enough to meet the company's investment needs for future-oriented businesses like AI and the metaverse.

Meta CEO Mark Zuckerberg defended the company's significant spending plans during the earnings call, predicting that this year will be a "truly significant year" for AI, with Meta's AI assistant becoming the most widely used assistant in the industry. He stated:

"In the field of AI, I expect this year to be a year where highly intelligent and personalized AI assistants cover over 1 billion people. I anticipate that Meta AI will become the leading AI assistant."

On Wednesday, January 29, Eastern Time, Meta announced its fourth-quarter financial data for the period ending December 31, 2024.

1) Key Financial Data

Revenue: Fourth-quarter revenue was $48.39 billion, a year-on-year increase of 21%, compared to analysts' expectations of $46.98 billion, with a 19% growth in the third quarter.

EPS: The diluted earnings per share (EPS) for the fourth quarter was $8.02, a year-on-year increase of 50.5%, compared to analysts' expectations of $6.78, with a nearly 37.4% growth in the third quarter.

Capital Expenditure: Including principal payments on finance leases, fourth-quarter capital expenditure was $14.84 billion, a year-on-year increase of 87.8%, compared to a 36% year-on-year increase to $9.2 billion in the third quarter, totaling $39.23 billion for the year.

Operating Profit: The operating profit for the fourth quarter was $23.37 billion, a year-on-year increase of 43%, compared to analysts' expectations of $20.09 billion, with a 26% growth in the third quarter.

Net Profit: The net profit for the fourth quarter was $20.84 billion, a year-on-year increase of 49%, with a 35% growth in the third quarter.

2) Segment Business Data

Advertising: Fourth-quarter advertising revenue was $46.78 billion, a year-on-year increase of approximately 21%, with an 18.7% growth in the third quarter.

Family of Apps: Including Facebook, Instagram, Messenger, WhatsApp, and other services, the family of apps generated $47.3 billion in revenue in the fourth quarter, a year-on-year increase of approximately 21%, compared to analysts' expectations of $46.08 billion, with a 29% year-on-year growth in the third quarter. The operating profit for this business in the fourth quarter was $28.33 billion, a nearly 35% year-on-year increase, compared to analysts' expectations of $25.3 billion.

Reality Labs: Including AR (augmented reality) and VR (virtual reality) related hardware, software, and content, the metaverse-related business Reality Labs generated $1.08 billion in revenue in the fourth quarter, a year-on-year increase of 1%, compared to analysts' expectations of $1.11 billion, with a 29% year-on-year growth in the third quarter. The operating loss for the quarter was $4.97 billion, with losses expanding by approximately 7% year-on-year, compared to analysts' expectations of a $5.1 billion loss

3) Performance Guidance

Revenue: Revenue for Q1 2025 is expected to be between $39.5 billion and $41.8 billion, with analysts expecting $41.67 billion.

Expenses: Total expenses for 2025 are expected to be between $114 billion and $119 billion, with analysts expecting $108.01 billion.

Capital Expenditure: Total capital expenditure for 2025 is expected to be between $60 billion and $65 billion, with analysts expecting $52.41 billion.

Before the earnings report was released, Meta's stock price, which had risen over 0.3%, initially fell more than 4% in after-hours trading, then turned to rise. After the earnings report was released, it quickly erased the slight gains from after-hours trading and turned to decline, at one point dropping over 5%, before turning to rise again. Zuckerberg expressed optimistic expectations during the earnings call that AI assistants would make significant strides this year, and that Meta's assistant would lead the industry, causing Meta's stock price to rise over 5% in after-hours trading.

Q4 Total Revenue and Advertising Revenue Both Increased by 21%, EPS Increased by Over 50%, Daily Active Users of App Family Reached 3.35 Billion

The earnings report shows that Meta performed exceptionally well in Q4, with both revenue and EPS earnings exceeding expectations, breaking the company's own record for the highest quarterly results, and accelerating growth compared to Q3.

Revenue was 3% higher than analysts' expectations, with a year-on-year growth rate of over 20%. EPS was 18% higher than analysts' expectations, with a year-on-year growth rate slightly exceeding 50%, which was over 30% higher than analysts' expected growth. Digital advertising, which accounts for 97% of the company's total revenue, also achieved a strong growth of over 20% in Q4, a rare occurrence in recent years.

The revenue growth of the app family business, which includes social media platforms like Facebook, slowed compared to Q3 but still increased by over 20%, exceeding analysts' expectations by 2.6%. The daily active users (DAU) of the app family reached 3.35 billion in Q4, a year-on-year increase of 5%, which was 2% higher than analysts' expected 3.28 billion.

Meta did not disclose how many users its Threads, a competitor to X, currently has in the earnings report. CEO Zuckerberg stated that Threads "adds over 1 million new registered users every day," and his goal is to reach 1 billion users in the next "few years."

The revenue of the Reality Labs, related to the metaverse business, was slightly below analysts' expectations in Q4, but the losses for the quarter were lower than expected, with annual revenue growth of 13%.

No Revenue Guidance Provided for This Year; Capital Expenditure May Exceed Analysts' Expectations by Over 20%

Meta's performance guidance has disappointed Wall Street. The revenue guidance for the first quarter is below expectations, corresponding to a year-on-year growth of 8% to 15%, with the entire guidance range's growth significantly lower than the 21% in the fourth quarter. The average expected by analysts is at the high end of the guidance range. Moreover, Meta did not provide revenue guidance for the entire year, only stating that it expects investments in the company's core business this year will provide opportunities for continued strong revenue growth.

Regarding capital expenditures, Meta reiterated the plan announced by Zuckerberg last Friday, stating that capital expenditures this year will reach $60 billion to $65 billion, which is 14.5% to 24% higher than analysts' expectations. Based on this guidance, Meta's planned capital expenditures this year are expected to grow by 52.9% to 65.7% compared to last year.

Meta stated that the growth in capital expenditures this year will stem from increased investments in generative AI and the company's core business, with expenditures continuing to be directly allocated to core operations.

As shown in the chart below, in the second and third quarters of last year, Meta's capital expenditures were below expectations, while the fourth quarter saw a significant rebound and exceeded expectations.

Zuckerberg: The latest Llama model has made "great progress"

Recently, the success of DeepSeek has led to increased skepticism in the market regarding whether the substantial investments by American tech giants like Meta in developing AI are yielding reasonable returns.

While the American industry praises the achievements of DeepSeek, commentators believe that behind the accolades, there is a consensus among U.S. politics, Wall Street, and Silicon Valley that DeepSeek is the main competitor to Meta's open-source model Llama. Several Wall Street analysts stated on Monday that DeepSeek's innovations indicate that Meta is falling behind in the AI race.

During Meta's fourth-quarter earnings call, Zuckerberg stated that the latest Llama model is making "great progress."

Despite Llama facing fierce competition from both domestic and international models, Zuckerberg expressed his belief that there is still room in the market for multiple AI applications to thrive.

Zuckerberg said that users want their AI to be personalized based on their environment, personal interests, personality, culture, and worldview, "I don't think there will be a large AI that everyone uses for the same purpose. People will be able to choose how their AI works and what it looks like to them."

In addition to predicting that Meta's AI assistant will lead the industry in what he expects to be a "significant year" for the entire AI sector, Zuckerberg also stated that he anticipates the possibility of building an AI agent with the coding and problem-solving abilities of a mid-level engineer this year. "This will be a far-reaching milestone and could become one of the most important innovations in history." He hopes Meta can achieve this goal