Meta Platforms Q1 Net Profit Surged 61% Year-on-Year; Why Did Shares Sink Over 7% After Hours?

In terms of specific business segments, the advertising business achieved healthy growth in both volume and price during the first quarter—ad impressions increased 19% year-over-year, and the average price per ad grew 12% year-over-year. Together, these factors drove advertising revenue up 32.93% year-over-year to $55.024 billion, propelling total revenue for the Family of Apps segment to $55.909 billion.

As of this month, Family Daily Active People (DAP) reached 3.56 billion, up 4% year-over-year, maintaining a massive, globally leading user base. The slight quarter-over-quarter decline was attributed by the company to external factors, specifically internet outages in Iran and Russia's restrictions on WhatsApp access.

Notably, the Metaverse-related Reality Labs segment remains in a continuous "cash-burn" phase, recording revenue of $402 million in the first quarter. Although operating losses remained at approximately $4 billion, the loss narrowed significantly by 33.1% on a quarter-over-quarter basis.

This is also consistent with Mark Zuckerberg's previous strategic pivot for Reality Labs.

Meta recently announced that starting June 15, consumers will no longer be able to create, publish, update, or access virtual worlds via Meta Quest headsets. Additionally, Andrew Bosworth, head of Reality Labs, stated in an internal memo to employees that Meta's future focus will shift from headset-driven "fully immersive virtual worlds" to "mobile experiences" via smartphones.

This move marks a gradual fading of the core Metaverse vision as the company transitions to a new phase of mobile-first strategy and AI-focused development.

The core reason that truly triggered the investor sell-off was Meta's significant upward revision of its full-year 2026 capital expenditure guidance. Specifically, Meta Platforms expects second-quarter total revenue to be between $58 billion and $61 billion, with the midpoint of that range slightly trailing the market expectation of $59.56 billion.

Regarding expenditure guidance, the company expects total expenses for the full year 2026 to be between $162 billion and $169 billion, unchanged from the previous forecast.

However, Meta raised its 2026 capital expenditure forecast to a range of $125 billion to $145 billion, significantly higher than the previous projection of $115 billion to $135 billion. Meta attributed this to rising component prices this year and additional data center costs required to support future capacity. This signal indicates that Meta's AI investment cycle is still in an acceleration phase, and capital consumption will remain elevated in the short term.

To offset the pressure of massive spending in the AI field, Meta has recently launched aggressive cost-cutting and efficiency measures. The company recently announced it would lay off approximately 8,000 employees while leaving 6,000 vacant positions unfilled; the overall workforce reduction accounts for about 10% of the total headcount. As of March 31, the company had 77,986 employees, a year-on-year increase of only 1%.

According to Evercore ISI estimates, the layoffs could save the company approximately $3 billion in annual expenses, as the company increasingly relies on AI agents to perform tasks that previously required manual intervention, further lowering operating costs. However, in the market's view, $3 billion in annual savings is a drop in the bucket compared to annual capital expenditures in the hundreds of billions, and it is far from enough to offset the margin compression pressure caused by increased investment.

More importantly, the uncertainty surrounding the returns on Meta’s massive AI bet remains high. Although AI technology has begun to empower its core advertising business, the incremental growth it brings has yet to fully convince investors in the face of continuously soaring capital expenditures.

The market's cautious stance toward this earnings report also stems from a re-examination of the quality of earnings underlying the high net profit growth.

Meta's substantial 61% year-over-year growth in first-quarter net profit included an $8.03 billion one-time income tax benefit, which is a one-time non-cash gain related to tax policy adjustments and is not sustainable.

Stripping out this one-time tax benefit, the company's diluted earnings per share for the first quarter would have been $3.13 lower. This indicates that Meta's high net profit growth this quarter was not entirely driven by profitability improvements in its core business, which to some extent dampened the bullish effect of the earnings report.

Overall, Meta’s quarterly earnings report showcased steady growth in its advertising business and a stellar performance that beat revenue and profit expectations; however, it also revealed shortcomings such as upwardly revised capital expenditures and a discount on the quality of its earnings.

The after-hours share price plunge reflects a repricing of future strategic risks and rewards by the capital market, rather than a wholesale rejection of Meta’s current performance. The core tension for the company lies in the divergence between investor demands for short-term earnings and the company’s long-term strategic investments.

Looking ahead, Meta has no room to slow its investment as the AI arms race intensifies; falling behind in AI competition would threaten its existing social media and advertising moats. Whether Meta can translate soaring capital expenditures into sustainable earnings growth remains the primary focus for investors and will determine the future trajectory of the social media giant’s stock price.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.