How Meta is giving its investors an edge despite growing competition

In Meta platformit is (FB 5.42%) most recent earnings report, there were signs of a pullback with net income down year-over-year and greater competition playing a part. In this video clip from “The Virtual Opportunities Show” on Motley Fool Live, recorded on May contributor Jose Najarro explains how the company’s investment in artificial intelligence is encouraging for the company’s future.

Jose Najarro: First of all, if we take a quick look, Meta Platforms total revenue for their financial results was $27.9 billion. That was up 7% year over year. Again, this is a company that was probably experiencing strong double-digit growth and now we’re seeing a bit of a pullback. Their net income has definitely taken a huge hit, as this company obviously focuses on Virtual Reality Labs, that’s what they call it. But net income was $7.5 billion, down 21% year over year.

Their monthly active people, spread across all of their apps, were 3.64 billion, up 6%. There is still some growth in their overall products. I think it’s crazy the amount of numbers we see there. They are still pursuing a strong buyback program. This quarter alone, they bought about 9.4 billion shares and they still have about 29.4. I would be surprised if in doing these price cuts that we see now with a lot of companies, I would be surprised if they didn’t add more stock at those times.

It is a company with very solid finances. We can see about $44 billion in cash in short-term investments. Some pretty neat things that I really like about meta-platforms is that they continue to push this movement towards artificial intelligence. I think I talked about it on the show. That’s one thing where I think the meta-platforms got it wrong when they said, hey, we’re focusing on meta-realities or this virtual reality and this meta-universe.

In there, they also mentioned that they are focusing on artificial intelligence. I feel like this quarter, in this earnings report, they were like we need to explain a little better what we’re going to spend our money on. They mentioned a huge push in artificial intelligence. The great thing about artificial intelligence is going to help in a lot of their products.

First the advertising. As we mentioned before, Travis mentioned that they don’t have as much data as before. Now, with artificial intelligence with this enhancement, they’ll either be able to increase those ad returns with less information with the investments they’re making in AI.

Then comes the retention rate and suggestions. With artificial intelligence, they will be able to either push the right content to the right people on their platforms, Instagram, Facebook, or whatever, which will allow that user to have a more positive reaction to their platform and stay longer. If you stay longer, interact more with more Facebook, with more Instagram, you are more likely to be hit with more ads at the end of the day, which will increase the company’s total revenue.

They mentioned a few long-term goals. First, they wanted to reiterate to investors that they are really focused on these family apps and want to grow there. Then this massive profit growth that they’re seeing there, they want to focus on the reality labs. Unfortunately, as much of the risk is happening this year, they don’t think that will be the case for 2022.

They mention that they are slowing down things like hiring employees. One of the main reasons is that they want to keep improving that operating cash flow. They also reduced the amount of money they expected to use again this year with the hiring of employees and perhaps some of the investments they are slowing down.

Now they expect their total capital spending this year to be between $87 billion and $92 billion, down from $90 billion to $95 billion. Somehow, this company realized another $3 billion in savings somewhere along the line for the year.

I think there are still major risks for meta-platforms. First, the current downturn in e-commerce, just as Demitri mentioned with best buy (ABY 1.47%) last year a huge year for e-commerce or stores in general. Now companies see that we may not be seeing the same amount of consumer spending right now for too many reasons.

Some of them could be that financial stimulus check that many have received. This slowdown causes advertising to slow down. Obviously, the big changes that are happening in the world of advertising. Other things like Ukraine and Russia also impact certain regions that they might produce ads for.

Inflation and interest rates, as Travis mentioned earlier today, when companies start getting some of their profits, one of the first places they start looking to cut expenses is the advertising world.

Finally the competition. You still have big players. TikTok continues to be a huge form of entertainment for many people, especially in the short term. TikTok is really getting better. They’re making sure their creators get paid, and they’re adding new solutions for their creators, which ultimately is going to create this flywheel effect that’s going to drive more creators to TikTok. More creators on this platform will likely lead to more users. There’s a lot of competition right now.

I believe most of these risks are probably short term outside of competition. I am personally a shareholder of Meta Platforms. I appreciate their technical aspects and I think it can really help the company to go in the future.