Meta stock rallies as rosy forecast shows AI helped boost ad sales

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Biden announces new AI safeguards negotiated with Google, Meta, Microsoft
U.S. President Joe Biden announced on Friday a set of new Artificial Intelligence (AI) safeguards that his administration brokered with Microsoft, Meta, Google and other tech companies leading the development of AI technology. "Today, I'm pleased to announce that these seven companies have agreed to voluntary commitments for responsible innovation. These commitments, which the companies will implement immediately, underscore three fundamental principles: safety, security and trust," Biden said. – Jul 21, 2023

Meta shares surged nearly 10 per cent 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.

The Facebook owner was set to add over $70 billion to its market value, based on premarket movements, after strong second-quarter earnings encouraged 16 analysts to lift their target price on a stock that has already more than doubled this year.

“Meta (is) in a class-of-their-own in digital ads,” said Mark Shmulik of Bernstein, adding that its “monster guidance blew the doors off with an expected growth rate of +15-24% — numbers investors were hoping to maybe see as early as Q4.”

While Meta’s 12 per cent rise in second-quarter ad revenue surpassed the three per cent growth at Alphabet’s Google, earnings reports from both the digital ad behemoths reinforced a recovery in the sector.

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Meta and Google are on track to add more than $170 billion to their combined market capitalization – a figure that is more than the individual market values of about 90% of the companies in the S&P 500 index.

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Smaller rival Snap, however, disappointed on ad sales as advertisers stick to tried and true platforms.

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Meta’s results were also supported by improving monetization of Reels, a short-form video format that is the company’s answer to TikTok. CEO Mark Zuckerberg said Reels now has an annual revenue run rate exceeding $10 billion, up from $3 billion last fall.

“Advertisers are gaining confidence in Meta’s enhanced and AI-powered campaign planning and measurement capabilities, and spending more. Unsurprisingly, Reels monetization keeps improving,” said Morningstar analyst Ali Mogharabi.

The positive analyst view reinforces how a focus on cost cuts and higher engagement through AI has helped Meta turn into a Wall Street darling this year after being derided for much of 2022 for its hefty spending on the ambitious metaverse.

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Analysts have a median price target $342.50 on Meta, which represents an upside of 15 per cent to its stock’s last close. The company has 12-month forward price-to-earnings ratio of 21.28, higher than Alphabet’s 20.47 and the industry median of 15.18.

The accelerating revenue growth at Meta helped allay some concerns about an expected jump in expenses in 2024 due to legal fees and increased spending on infrastructure considered key to the tech sector’s feverish AI race.

“There is an element of uncertainty in CapEx spending growth for 2024. That said, we do also see a series of monetization opportunities that can be sprung out of these innovations,” said Mark Mahaney of Evercore ISI.

(Reporting by Aditya Soni in Bengaluru; Editing by Saumyadeb Chakrabarty)

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