Meta ETFs Plunge on Sales Outlook, AI Spending

Shares of Meta Platforms Inc. sold off hard on Thursday, dragging down exchange-traded funds holding large stakes in the social media company, after it said revenue this quarter will be less than expected and that it would boost spending on artificial intelligence projects.

Meta fell as much as 16% before retracing some losses as investors used the drop as an opportunity to buy.

The $18 billion Communication Services Select Sector SPDR Fund (XLC), which has 29% of its portfolio in Meta, was down 4% shortly after noon. 

The leveraged GraniteShares 2x Long META Daily ETF (FBL) was last trading down by 24%.  

The company behind Facebook, Instagram and WhatsApp reported earnings and revenues for the first quarter that were solidly above expectations.

Earnings per share for Q1 came in at $4.71, above the $4.31 that analysts were expecting. Revenues of $36.5 billion were also above expectations of $36.1 billion.

However, investors took issue with revenue guidance for the second quarter. At the midpoint, the company’s estimate for Q2 revenue of $37.75 billion was slightly below the $38.2 billion that analysts were expecting.

Some investors were caught off guard by the forecast, especially since Meta had been beating estimates and raising guidance over the past several quarters.

Those beat and raise quarters had powered the stock to a 40% gain in the year-to-date period leading up the latest earnings report and a 136% gain over the past year.  

Accelerating Investments  

But it wasn’t just the Q2 revenue guidance that disappointed investors.

Meta increased its expense outlook for 2024. Expenses are forecast to be $96 billion-to-$99 billion, up from the firm’s prior outlook of $94 billion-to-$99 billion “due to higher infrastructure and legal costs,” and they may continue to rise in 2025 and beyond. 

“While we are not providing guidance for years beyond 2024, we expect capital expenditures will continue to increase next year as we invest aggressively to support our ambitious AI research and product development efforts,” the company wrote in a press release.  

Meta CEO Mark Zuckerberg elaborated on the higher expenses in his earnings conference call remarks. 

“I expect to see a multi‐year investment cycle before we've fully scaled Meta AI, business AIs, and more into the profitable services I expect,” he said, while adding that the company might not realize the benefits of those investments immediately. 

Zuckerberg went on to say that Meta stock has “historically seen a lot of volatility…during this phase of our product playbook—where we're investing in scaling a new product but aren't yet monetizing it.”

Bullish Analysts

The combination of guidance that was a bit lighter than expected and heavier investments spooked investors and was the reason for Meta’s drop on Thursday.

But not everyone was so downbeat. Most analysts remained positive on the stock following the Q1 earnings report.

“Meta’s substantial investment in AI has the ability to hugely improve engagement with its platforms, and therefore the amount marketers are prepared to pay for ad space,” wrote Hargreaves Lansdown analyst Sophie Lund-Yates.

Meanwhile, Morgan Stanley analyst Brian Nowak said he agrees with Meta’s decision to increase its investments as they will lead to “more durable engagement and revenue growth.”