Will Meta Win the Digital Advertising Race?

Meta’s (Nasdaq: META) recently announced quarterly results that outpaced market expectations and sent the stock climbing 10% in the after-hours trading session. This was the tenth straight quarter that Meta surpassed the outlook.

Meta’s Financials

Meta’s second quarter revenues grew 22% to $47.52 billion, ahead of the Street’s expected $44.8 billion. EPS of $7.14 was also significantly ahead of the market’s estimate of $5.92.

Meta’s advertising revenues came in at $46.56 billion, ahead of expectations of $43.97 billion. Reality Labs hardware division revenue was $370 million and operating loss was $4.53 billion.

Among key metrics, Daily Active Users grew 1.4% q-o-q to 3.48 billion, ahead of analyst estimates of 3.45 billion.

For the third quarter, Meta expects revenues of $47.5-$50.5 billion compared with analyst estimates of $46.14 billion. It did not provide a revenue outlook for the year, but Meta expects to incur capital expenditures of $66-$72 billion compared with $64-$72 billion anticipated earlier.

Meta’s AI Investments

Meta remains focused on AI opportunities. As AI systems improve themselves, Meta is convinced that developing personal “superintelligence is now in sight”. Unlike a school of thought which focuses superintelligence to help automate valuable work, Meta believes that superintelligence will help people pursue their individual aspirations in new ways while expanding prosperity, science, health, and culture. It wants to share superintelligence with the world as broadly as possible. Despite safety concerns surrounding AI, Meta believes that “building a free society requires that we aim to empower people as much as possible”. As part of this initiative, Meta has been investing heavily in hiring its Superintelligence Labs (MSL) team.

Earlier this month, Meta announced the acquisition of AI voice startup WaveForms for an undisclosed sum. WaveForms was founded earlier this year by Meta and OpenAI researcher Alexis Conneau and former Google advertising strategist Coralie Lemaitre with a mission to solve the Speech Turing Test. The test aims at determining whether a listener can tell human from AI-generated speech. It has also been working on AI with Emotional General Intelligence so that AI could understand and manage human-like emotions.

Prior to the acquisition, WaveForms was privately held and had raised $40 million from Andreessen Horowitz at a valuation of $160 million. Its website has gone dark since the acquisition, and additional details have not been publicly disclosed.

Last month, Meta acquired PlayAI, a California-based voice AI startup founded by Mahmoud Felfel and Hammad Syed in 2020. Terms of the transaction were not disclosed. Play AI is known for its flagship product, Play Dialog. It is a multi-turn speech model that has been trained to excel in understanding context and responding with nuanced emotion. Prior to the acquisition, PlayAI had raised $21 million in funding from Kindred Ventures, 500 Global, Y Combinator, Race Capital, Soma Capital, and Pioneer Fund at undisclosed valuation. Being privately held, it does not disclose any financial details. Meta plans to leverage PlayAI’s expertise across AI Characters, Meta AI, Wearables, and audio content creation.

In June this year, Meta also announced plans to invest $14.3 billion in Scale AI, a start-up focused on data to train artificial intelligence systems. As part of the deal, Alexandr Wang, Scale AI’s CEO will step down from his position at Scale AI and instead head Meta’s MSL team. To manage possible regulatory concerns, Meta will acquire 49% holding in the company and will receive little control over the direction of Scale AI. Scale AI plans to invest the proceeds to accelerate innovation and strengthen strategic partnerships with customers. It claims that it will remain an independent leader in AI committed to the mission of providing AI solutions and safeguarding customer data. But post the announcement of the deal, OpenAI and Google reportedly began winding down their work with Scale AI.

Meta has had a disappointing performance with its own LLMs, and the addition of talent from these AI companies is expected to help it gain lost ground.

Meta is already seeing the impact of AI on advertising revenues. Advertising revenues for the company grew 22% over the year, compared with Google’s 10% growth. Meta attributes the deployment of AI tools to the growth. AI tools are driving more efficiency across the advertising platform. Last quarter, Meta introduced personalization enhancements to Andromeda, its AI-powered recommendation model for ads, that drove 5% more ad conversions on Instagram and 3% more on Facebook. Andromeda is also being rolled out to new areas, including Facebook Reels.

As search traffic continues to go to AI engines, Google’s ad revenues are possibly at risk. Google is addressing the concern through the use of faceted searches, AI Overview, and other such features. While Google remains the leader in advertising, Meta is catching up fast.

Meta’s stock is trading at $765.87 with a market capitalization of $1.92 trillion. It hit a 52-week high of $784.75 soon after result announcement. The stock has climbed from the 52-week low of $479.80 that it had fallen to in April.

Disclosure: All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article. I am an investor in this company.

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