Meta Shares Climb as Strong Earnings Fuel AI Investment Plans
The tech giant reported a 26% surge in quarterly revenue and announced a new stock class to fund its artificial intelligence ambitions.
Meta shares experienced a significant jump in after-hours trading Wednesday, rising more than 4% following the company's announcement of a 26% increase in quarterly revenue and strategic plans to finance its extensive artificial intelligence (AI) initiatives. The surge saw shares climb to $726 in after-hours trading, a nearly $30 increase from its closing price.
The social media conglomerate reported third-quarter revenue of $64.6 billion, a notable increase from $51.2 billion in the same period last year. This growth was primarily driven by a 26% rise in advertising sales, which reached $63.1 billion.
Meta projected fourth-quarter revenue between $73 billion and $76 billion. CEO Mark Zuckerberg stated in a release that the company's investments are yielding positive results, with the core business showing strength and velocity across various metrics. He highlighted significant AI milestones, including the launch of "Muse" and "Muse Wonder," the company's initial frontier AI models.
Advertising impressions across Meta's platforms, including Facebook and Instagram, increased by 10% year-over-year, while the average price per ad rose by 14%. The company reported net income of $9.86 billion, or $3.83 per diluted share, a substantial increase from $2.71 billion, or $1.05 per diluted share, in the prior year.
However, Meta's reported earnings were impacted by a charge of nearly $9.89 billion. This charge is associated with a legal settlement reached in August with 52 state attorneys general concerning litigation over teen mental health and social media practices. The settlement includes potential payments of up to approximately $18.59 billion.
This legal charge contributed to a 37% decrease in operating income, which fell to $12.99 billion, despite the revenue growth. The company noted that excluding this charge, operating profit would have been $22.88 billion, with diluted earnings per share at $7.40. Meta also benefited from a significantly lower income tax provision of $3.14 billion, compared to $18.95 billion in the previous year's quarter.
Capital Structure Shift
In a significant move, Meta's board approved the creation of a new class of non-voting shares, designated as Class C stock, which will begin trading on January 19, 2027. This structural change is intended to facilitate funding for Meta's expanding AI endeavors while maintaining Mark Zuckerberg's leadership. Existing Class A shares trade on Nasdaq, and the new Class C shares will not carry voting rights.
The plan involves shareholders receiving one nonvoting Class C share for each Class A or Class B share they hold. This distribution is expected to effectively function as a two-for-one stock split concerning the market price of Class A shares, without altering shareholder voting power.
Meta is increasing its investment in AI, with capital expenditures, including principal payments on finance leases, totaling $34.91 billion in the third quarter. The company now forecasts full-year capital expenditures between $135 billion and $145 billion. This intensified spending led to a negative free cash flow of $2.12 billion for the quarter, a contrast to the positive free cash flow of $10.63 billion recorded in the same period last year.
According to Meta, its AI investments are already driving increased advertising revenue through enhanced recommendations, improved user engagement, and more effective monetization strategies. The company also indicated a strategic shift to allocate more investment toward AI and less toward its Reality Labs division, which focuses on virtual and augmented reality products.