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Friday, July 19, 2024

AI-Powered Ad Sales Drive Meta’s Monster Forecast

Meta (META.O) Shares surged nearly 10% on Thursday as a rosy revenue forecast showed that artificial intelligence was helping the social media giant boost engagement and ad sales even in an uncertain economy. Based on premarket movements, the Facebook owner was set to add over $70 billion to its market value after strong second-quarter earnings encouraged 16 analysts to lift their target price on a stock that has already more than doubled this year.

The company raised its full-year profit forecast to $2.72 a share from $2.55, citing stronger-than-expected growth in its core advertising business and reduced expenses. It also lowered its expected 2022 total expenses to between $88.5 billion and $92 billion, reflecting savings from recent cuts and moves to reduce investments in new projects, including the virtual reality venture known as Metaverse.

Investors welcomed the news, sending shares of Meta up 17% in after-hours trading. The stock had been down for the past year as investors fretted about whether the company could monetize its ambitious investments in artificial intelligence and the virtual-world Metaverse. Several disappointing earnings reports from tech peers, such as Snap parent Alphabet and TikTok rival Snapchat may have exacerbated those worries.

However, in a surprisingly upbeat earnings call on Wednesday, Meta CEO Mark Zuckerberg sounded more confident about the company’s prospects than investors had expected. He pledged that 2023 would be a “year of efficiency,” cutting jobs, lowering data-center construction spending, and dropping projects not yielding the company enough revenue or profits. He said that improvements at the flagship platforms, such as boosting ad sales in the face of competition from TikTok and rolling out Reels, were driving more robust monetization.

In addition, he said that the company was seeing faster growth in its artificial intelligence capabilities than expected and that the generative AI product pipeline and Threads were generating higher-than-expected revenue. The results prompted Citi to reiterate its buy rating on the shares, raising its price target to $385 from $360, implying another 29% upside. Goldman Sachs increased its price target to $384 from $300, expressing similar optimism about the company’s prospects.

Despite the encouraging outlook, some analysts remained skeptical that the company could continue its resurgence without an improvement in the broader digital advertising environment. Especially with advertisers pulling back from Metaverse investment and other risky technology bets, such as autonomous vehicles and blockchain.

“We believe the overall ad environment remains challenging, and while we like the company’s improved margin outlook and repositioned capital expenditure profile, there is still concern about the ability to drive accelerated advertising growth in the near term,” wrote analyst Eric Sheridan at Wedbush Securities.

The company’s losses from the Metaverse unit, Reality Labs, will likely grow in 2023, as its efforts to create a 3D virtual world generate few customers. Investors are worried that the expensive bet on the Metaverse will not pay off and are eager for the company to show that it can re-focus its resources more effectively.

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