Author: Zhang YifanEditor: Shen SiqiSource: Hard AIOn July 31st, Meta will release its financial report for the second quarter of 2024. Citigroup predicts that this quarter, Meta may achieve double growth in revenue and operating profit. Hard AI will discuss the most concerning and value-influencing issues around the market based on Citigroup's report.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/eb117669-5db7-45d7-9513-4024f09d98ac.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/eb117669-5db7-45d7-9513-4024f09d98ac.png"/><h2>1. Why is the revenue growth expectation strong?</h2>1) AI-driven user growth: Market data shows that under AI drive, the number of users on Threads and Facebook increased in the second quarter. As of May, Facebook had over 40 million users aged 18-29 in the United States and Canada, reaching the highest point in three years. At the same time, the monthly active users of Threads in May also reached 175 million, an increase of 25 million compared to the previous month. The increase in the number of users often attracts advertisers better, ultimately leading to revenue growth for Meta.2) Rapid growth of Reels: According to Citigroup's survey, the ad load of Reels in the second quarter reached 21.5%, an increase of 1.5 percentage points from the previous quarter, with an average of 11 ads displayed in every 50 Reels videos. Citigroup predicts that the growth in ad exposure will continue the growth trend of Reels from previous quarters, achieving sequential growth in this quarter as well (see the figure below).<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/2af175b4-61b9-4859-adb5-8f09d5ca0536.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/2af175b4-61b9-4859-adb5-8f09d5ca0536.png"/>3) Strong demand in the advertising market: Google's search ad revenue in 24Q2 increased by 14% year-on-year, with retail and financial services being the main drivers, reflecting strong demand in the retail and financial services advertising market in the second quarter. Citigroup speculates that Meta, also primarily focused on retail, will benefit as well.4) AI technology upgrade: In the second quarter, Meta released Llama 3.1, with the number of parameters significantly increased to 405 billion, far exceeding the previous generation's 70 billion. After integrating Llama 3.1 into its business, Meta will have better AI capabilities to help attract users and advertisers more effectively.<h2>2. Why is the operating profit margin increasing?</h2>1) Continuous department restructuring and personnel optimization: In the second quarter, the company restructured the Reality Labs department and reduced costs, while maintaining recruitment at historically low levels. Citigroup expects the operating profit margin in Q2 to increase by 1.4% compared to the previous quarter.It is worth noting that personnel optimization may result in one-time large expenses (severance pay) for the company. In addition, although expenses for the Reality Labs department have been reduced, expenses for the AI business may continue to rise. Citigroup predicts that capital expenditures in 24Q2 will reach $9.6 billion, an increase of 43.3% compared to the previous quarter. The increase in capital expenditures may lead to a decrease in the operating profit marginIn addition, facing scrutiny from regulatory authorities on antitrust, data security, and privacy policies, the company may also incur substantial one-time expenses (legal fees).<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/74a19fd8-fa7a-46b6-9755-a1fabb0f86bb.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/74a19fd8-fa7a-46b6-9755-a1fabb0f86bb.png"/><img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d1a01743-8a73-4b4a-8e6d-da2c6c3e637a.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d1a01743-8a73-4b4a-8e6d-da2c6c3e637a.png"/><h2>3. What are the risks for the company?</h2>1) Privacy Policy Risk: Apple's privacy policy updates, or restrictions on Meta's data collection scope, may negatively impact Meta's advertising business;2) Competitor Risk: Competition from TikTok and other short video platforms may pose a threat to Meta's business; Sensor Tower data shows that in the second quarter, although there was a year-on-year increase in Facebook and Instagram user usage, there was a slight decrease compared to the previous quarter.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/a0df10d1-3dab-4e3b-abd4-98a07abe990c.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/a0df10d1-3dab-4e3b-abd4-98a07abe990c.png"/><h2>4. Citigroup's Forecast</h2>Based on the above analysis, Citigroup predicts that Meta's total revenue in Q2 2024 will reach $38.5 billion, a year-on-year growth of 20.2%; operating profit will be $15.1 billion, with an operating profit margin of 39.4%, higher than the market's general expectation of $14.4 billion; capital expenditure will be $9.6 billion, slightly higher than the market's general expectation of $9.4 billion.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/da0432bc-3f9e-4210-a5b1-ac1ccd8e934c.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/da0432bc-3f9e-4210-a5b1-ac1ccd8e934c.png"/>

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