Meta's Q4 guidance erases earnings-beat gains

Meta (META) reported its third quarter earnings on Wednesday, beating on the top and bottom lines. However, an initial wave of optimism was stymied after the company issued conservative Q4 guidance.

In the company's earnings call, Meta CFO Susan Li said that geopolitical unrest – both recently in the Middle East and more broadly – is leading to a "softening" ad market.

"It’s hard for us to attribute demand softness directly to any specific geopolitical event," Li told analysts. "Historically, we’ve seen broader demand softness follow other regional conflicts in the past, such as the Ukraine war. So, this is something we’re continuing to monitor. We’ve reflected the latest trends and advertiser reaction that we’ve seen into our Q4 outlook, which again, I think reflects the greater uncertainty and volatility ahead."

The company's shares initially rose as much as 4% in after-hours trading, but erased those gains in the aftermath of Meta's call and were over 3% lower in Thursday's pre-market.

Meta's been navigating rough waters, steadying itself as an AI-powered advertising giant and working through its capital-intensive expansion into VR and AR. The Facebook and Instagram parent has been in the process of shoring up two key areas of interest for investors — its AI efforts and its position in the digital advertising market, which has been in a prolonged slump and is just showing signs of a rebound.

Meta's Q3 advertising revenue came in at $33.64 billion, compared to the expected $32.94 billion. The company beat on ad impressions estimates, clocking an increase of 31% year over year, versus the expected 29.6%.

Meta shares have risen more than 130% year to date, massively outperforming both the S&P 500 and the Nasdaq Internet Index, which are up around 9% and 34% this year, respectively.

"The stock has done well this year," Neuberger Bergman analyst Daniel Flax told Yahoo Finance Live on Wednesday. "[If they can] drive durable growth and translate that into earnings per share and free cash flow generation, I think the stock can continue to work its way higher."

Meta's near future could be mired in legal risks, as the company is staring down federal and state lawsuits from 42 attorneys general, who are alleging that Facebook and Instagram's features geared toward children are addictive.

"We’re disappointed that instead of working productively with companies across the industry to create clear, age-appropriate standards for the many apps teens use, the attorneys general have chosen this path," a Meta spokesperson said in a statement.

Currently, Wall Street analysts' recommendations for Meta break down to 60 Buys, seven Holds, and two Sells.

The earnings rundown

Here are the key numbers that Meta reported, as compared to analysts' estimates compiled by Bloomberg:

Revenue: $34.15 billion actual, up 23% year-over-year, versus $33.52 billion expected

Earnings per share: $4.39 actual, up 168% year-over-year, versus $3.60 expected

Facebook daily active users: 2.09 billion actual, versus 2.07 billion expected

Reality Labs operating loss: $3.74 billion actual, versus $3.94 billion expected

Q4 revenue outlook: $36.5 billion-$40 billion actual, versus $38.76 billion expected

Zuckerberg's "Year of Efficiency" initiatives seem to be paying off, as the company is decreasing its 2023 capital expenditures outlook. It's revising the range to be between $27 billion and $29 billion, a decline from the previously announced $27 billion to $30 billion.

Meta's Family of Apps business, which also includes WhatsApp, raked in over $33 billion in revenue. The division's operating income was $17.49 billion for the quarter, handily beating analysts' expectation of $15.23 billion.

But Reality Labs, the company's mixed reality business, has been a subject of controversy. Since 2022, Meta has lost more than $20 billion running Reality Labs; $13.7 billion of that came from last year.

The company said it expects these losses to continue, and will increase notably year over year in 2023. Meta recently launched its Quest 3 headset, priced at $499.99.

"We had a good quarter for our community and business," Meta CEO Mark Zuckerberg said in a statement. "I'm proud of the work our teams have done to advance AI and mixed reality with the launch of Quest 3, Ray-Ban Meta smart glasses, and our AI studio."

Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on X, formerly Twitter, at @agarfinks and on LinkedIn.

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