The social media giant easily beat revenue and earnings estimates in Q1.
Its big tech earnings week and Meta Platforms (NASDAQ:META) got things started with excellent results that beat earnings expectations. But are there headwinds down the road for Meta?
The social media giant and owner of Facebook and Instagram generated revenue of $42.3 billion, which marked a 16% year-over-year increase. This bested estimates of $41.4 billion.
Net income soared 35% year over year to $16.6 billion, while earnings rose 37% to $6.43 per share. That crushed estimates of $5.28 per share.
Meta’s earnings benefitted from cost containment, as expenses only rose 9% in the quarter. It also got a boost from a lower effective tax rate of 9%, down from 13%.
“We’ve had a strong start to an important year, our community continues to grow and our business is performing very well,” Mark Zuckerberg, Meta founder and CEO, said. “We’re making good progress on AI glasses and Meta AI, which now has almost 1 billion monthly actives.”
6% jump in users
Meta makes most of its money on its social media properties and the ads on those sites. Advertising accounted for $41.4 billion of the $42.3 billion in revenue. This was boosted by a 6% increase in daily active people (DAP) – or users – on its family of apps to 4.43 billion. That was more than expected by analysts.
Ad impressions jumped 5% compared to the first quarter of 2024, while the average cost per ad increased by 10%.
Its other business, Reality Labs, which is its virtual reality arm, continues to struggle. It only generated $412 million in revenue in the quarter, down from $440 million in the same quarter a year ago. That was well below estimates of $492 million, according to CNBC.
Further, higher expenses led to a $4.2 billion net loss in the Reality Labs business, which was worse than the $3.8 billion net loss in the same quarter a year ago.
Outlook is clouded by tariffs
Meta provided its revenue outlook for the second quarter, calling for revenue to be in the range of $42.5 to 45.5 billion. That would be up from Q1 and roughly on par with estimates at the midpoint. But Meta didn’t offer guidance beyond that for revenue or earnings.
Total expenses for the full year are expected to fall between $113-118 billion, which is less than the previous outlook of $114-119 billion. In addition, full year capital expenditures are targeted to be in the range of $64-72 billion, up from the prior outlook of $60-65 billion.
“This updated outlook reflects additional data center investments to support our artificial intelligence efforts as well as an increase in the expected cost of infrastructure hardware,” CFO Susan Li said. “The majority of our capital expenditures in 2025 will continue to be directed to our core business.
Tariffs pose some uncertainty for Meta as well, as the company generates significant ad revenue from China. A recent article in the Wall Street Journal said the company generated about $18 billion in ad revenue from China last year.
“There’s just a lot of uncertainty around this given the ongoing, trade discussions,” Li said on the earnings call. “And so that is both reflected in the wider range that we are giving, and we’re also working on … on our end on mitigations by optimizing our supply chain, and our outlook is really trying to reflect our best understanding of the potential impact, this year … across all of that uncertainty.”
Some headwinds in Q3?
Meta also faces a potential headwind from the regulatory environment, particularly in the EU. Last week, the European Commission hit Meta with a 200 million euro fine over its subscription for no ads model, which is not compliant with the Digital Markets Act (DMA).
“Based on feedback from the EC in connection with the DMA, we expect we will need to make some modifications to our model, which could result in a materially worse user experience for European users and a significant impact to our European business and revenue as early as the third quarter of 2025,” Li said.
Meta will appeal the ruling, but modifications to the model may be imposed before or during the appeal process.
This is something to monitor, but overall, Meta looks like a pretty good value, trading at just 23 times earnings. It has a median price target of $700 per share, which suggests 21% upside. Meta stock has held up better than most of the Magnificent 7 stocks, down just 1% YTD. Investors should be cautious, but certainly Meta has a lower valuation than most Mag 7 stocks.
