Meta Q2 2024 earnings driven by AI and advertising growth

Meta generates revenue through advertising on its platforms: Facebook, Instagram, Messengers, and more recently Threads. WhatsApp has historically been less monetised to protect user experience and focus on growth.

The company has also expanded into virtual and augmented reality as part of its ‘metaverse’ vision. Additionally, it seeks to utilize AI to enhance user engagement, improve advertising effectiveness, and generate new revenue streams. Essentially, Meta is using AI to make its platforms more captivating and addictive for users.

Revenue increased 22.1% year-on-year to US$39.1 billion in Q2 2024 because of strong ad revenue growth across different markets and industries, especially from smaller advertisers. Assuming a similar growth trend and a 2% headwind from foreign currency, revenue in the coming quarter is expected to range between US$38.5 billion and US$41.0 billion.

In Q2 2024, Meta derived almost all its revenue from advertising. The online commerce sector was the primary driver of ad revenue growth, followed by the gaming and entertainment and media industries during the quarter. The overall revenue is expected to continue its positive trajectory in 2025 because of the core AI investments Meta made over the years.

Meta is leveraging AI to enhance its advertising platform and drive revenue growth. By optimising ad placement, personalising ads, and improving content recommendations, the company has achieved significant gains in ad performance and efficiency. Tools like Advantage+ Shopping and Meta Lattice are key components of this strategy.

The launch of Meta AI in several countries in Q2 2024, powered by the Large Language Model Llama, underscores the company’s dedication to AI innovation. This platform has gained popularity by allowing users to create custom AI assistants, further expanding Meta’s AI ecosystem. Meta AI is set to roll out in additional languages and countries, with new features and updates on the horizon. For instance, Meta introduced AI Studio, a tool that enables users to develop personalized AI assistants for a variety of purposes.

CEO Mark Zuckerberg has expressed that Meta is willing to sacrifice short-term profits to establish a robust foundation for future monetization. He is a strong advocate of open-source initiatives, including the generative AI model Llama, drawing on Meta’s previous successes with other open-source projects.

Family of Apps

Meta continues to focus on young users across its family of apps. According to Zuckerberg, Facebook, Instagram, and Threads recorded good year-over-year growth both in the U.S. and globally. In June 2024, the number of daily active users increased 7% year-on-year to about 3.3 billion.

Advertising revenue growth is expected to moderate in the coming quarter due to the absence of exceptionally strong growth drivers seen in the previous year, such as increased spending from Chinese gaming advertisers and rapid growth in Reels viewership.

Facebook and Instagram

Facebook continues to be the primary revenue generator for Meta. Its larger user base and established advertising ecosystem often give it a slight edge in terms of overall revenue contribution despite significant growth and contribution from Instagram.

CFO Susan Li highlighted increased monetisation opportunities for videos, especially short-form content. Reels offers significant growth potential due to its lower current ad load compared to Feed and Stories. To capitalise on this, Meta has ramped up and is optimising Reels ad load while enhancing video recommendations through a unified ranking system. Additionally, new ad formats like back-to-back Reels ads are being introduced. These efforts have contributed to increased Reels engagement.

Despite concerns about Facebook’s declining popularity among younger users, Li asserts that Meta is making strides in retaining this demographic in the U.S., particularly through features like Groups and Marketplace. There is a strong demand for used products in the country, and she sees Marketplace as ‘one prong in Meta’s broader e-commerce strategy.’ The platform emphasizes delivering a positive user experience for both sellers and buyers.

Revenue from Shops ads is also growing. Shops ads continue to drive incremental performance for advertisers, and its synergy with Advantage+ Shopping is yielding positive results. Facebook Shops and Instagram Shopping have been a focus for Meta in the U.S. market.

Threads

Threads became the fastest-growing app to reach 100 million users just five days after its launch, with monthly active users approaching 200 million. Rivalling X, Threads is quickly gaining momentum as a social media platform. However, its initial rapid growth does not guarantee long-term success. Sustaining user interest will be critical, as it risks being overtaken by another app, much like TikTok’s swift rise to prominence.

Messengers and WhatsApp

According to SimilarWeb, WhatsApp is the leading messaging app globally among Android users, while Messenger dominates in countries such as the U.S., Canada, and Australia. WhatsApp’s popularity is also growing in the U.S., with its monthly active users surpassing 100 million.

Other revenue from Family of Apps increased 72.9% year-on-year to US$389 million, driven by messaging revenue growth from WhatsApp. In the short term, Meta will prioritise growing WhatsApp’s business messaging features while preserving its ad-free and simple interface. The company aims to build a larger user base and trust before monetising the platform. For instance, Meta is currently developing AI tools designed to help businesses efficiently manage their product catalogues and boost sales.

Reality Labs

Meta’s Reality Labs segment focuses on developing virtual reality (VR) and augmented reality (AR) hardware and software, and other long-term initiatives. Notable products include the Quest 3 VR headset and Ray-Ban Meta smart glasses, which have performed well with sales exceeding expectations due to strong demand. Despite this, Meta reported a segmental operating loss of $4.5 billion in Q2 2024, driven in part by increased headcount-related and inventory costs. This loss is expected to widen year-on-year for the full year 2024 due to continued investment in product innovation and ecosystem expansion.

Key analyst questions

Several analysts were concerned about the level of capital expenditure that Meta incurs in the short term that could potentially affect shareholder returns. Zuckerberg reiterated that Meta is investing in infrastructure ahead of demand to capture opportunities and avoid getting left behind given the long gestation period to launch a new product. At the same time, it will aim to maintain its operational efficiency.

The demand for data centers currently exceeds available capacity, prompting Meta to prioritize generational AI training over short-term revenue growth until additional capacity becomes available in 2025. This strategic shift has been considered in the company’s upcoming Q3 outlook.

Meta’s capital expenditure is flexible and broadly divided into two categories: core AI and generative AI. Core AI follows an ROI-based approach targeting short-term returns, such as enhancing user engagement and ad performance, while generative AI is focused on long-term growth and revenue opportunities. Capex is projected to rise significantly in 2024, ranging between US$37-40 billion, and continue increasing into 2025, primarily driven by depreciation, operating, and research and development expenses. Much of this investment is tied to Llama, supporting core ad ranking and improved content recommendations.

As a result of a prolonged hiring freeze in 2023, headcount is expected to increase year-on-year in 2024 in a disciplined and targeted manner.

According to an analyst, Meta had 12 million advertisers across its platforms, which was a dated figure. Li kept mum about the latest figure.

Meta faces substantial regulatory scrutiny in both the U.S. and Europe due to its vast size and influence over digital communication. The company’s practices, especially regarding data privacy, competition, and content moderation, have come under increased examination. As Meta continues to develop and refine its AI products, it remains committed to engaging with regulators, with a focus on prioritizing user privacy and data control.

The fifth perspective

Meta delivered a strong Q2 performance, led by robust ad revenue growth across regions and increasing contributions from smaller advertisers. The company’s strategic investments in AI, including advancements in ad targeting and personalisation, are positioning it for continued growth. While facing potential headwinds in the upcoming quarter, Meta’s focus on innovation and user experience positions it favourably for long-term success.