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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
It was both a bad week for Meta Platforms, and a great one. The Facebook owner’s shares fell 10 per cent after it reported earnings on Wednesday, yet its sales and profit are growing at what, for normal companies, would inspire jubilation. This contradiction isn’t so strange, because there are really two Metas: the one that exists, and the one Mark Zuckerberg is building. One somewhat offsets the other.
Look from a distance and Meta is a surprisingly simple business. Almost all of its revenue comes from selling ads on Facebook and Instagram. Growth is driven by two fairly uncomplicated levers: how many ads it serves, and how much it charges advertisers for each ad. Those have sometimes swung around wildly, but now are both growing smartly. Meta’s ad sales in the latest quarter grew 33 per cent, the fastest rate since September 2021.
That simplicity is also a problem for investors. Ad sales are cyclical, but Meta’s costs aren’t, and its vast spending on AI — which may now hit $145bn this year — follows a different cycle altogether. The more debt it adds to its once-pristine balance sheet, including a $25bn bond sale it disclosed on Thursday, the more the effect is amplified.
The mismatch understandably makes investors nervous. While Google parent Alphabet depends mostly on ads too, it has more diversified revenue. By selling cloud computing and now microchips that it designs, its revenue is more closely linked to the AI infrastructure cycle.
What weighs more on Meta’s valuation is probably Zuckerberg himself. First, he is spinning a lot of plates, from building data centres and selling “smart glasses” to making, and possibly unwinding, big acquisitions. But more importantly, his worldview is not like that of a typical chief executive. As he told analysts on Wednesday, when it comes to developing new products, making a profit doesn’t just come second: it comes fourth, after quality, then scale, then working out a revenue model.
Sometimes, as with its Reels video product, that works. Sometimes, as with the mothballed Metaverse, it doesn’t. As for how superintelligence will make a profit, Zuckerberg seemingly doesn’t think it matters yet.
If all AI does is continue to help Meta grow ad sales faster than the market rate, that’s not half bad; the stock may even look cheap. Analysts forecast that revenue growth will slip below 20 per cent by 2028, according to LSEG. Keep that rate at 25 per cent and, all else being equal, its earnings would beat consensus estimates for that year by a third.
But the friction between how investors think and how Zuckerberg does is stark, and explains why Meta trades at a lower price-to-earnings multiple than the rest of the so-called Magnificent 7. As the company’s controlling shareholder, he’s here to stay. But when the Facebook founder says, as he did this week, that what drives humanity forward is “people pursuing their individual aspirations”, investors should take him at his word.
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