NVIDIA and others are happy again, Microsoft, Google, Meta are still buying GPUs

Author: Zhang Yifan

Editor: Shen Siqi

Source: Hard AI

Which direction will AI ferment in? This may be the most pressing question for investors at the moment.

As of this morning, Google, Meta, and Microsoft have successively released their second-quarter financial reports. Benefiting from AI-driven initiatives, all three companies have achieved double-digit growth in revenue and profit. However, from the conference calls, investors are eager to know whether the money spent on AI can ultimately bring returns.

Therefore, investors on the conference calls took turns asking about the capital expenditures of the tech giants. Why were they increased this quarter? Will they be increased next quarter? How will the full-year capital expenditure guidance change? What is the appropriate level of increase?

The essence of these questions is to inquire whether the current business models of the tech giants in AI can eventually be profitable, and how long investors need to wait. The companies themselves are not certain about the former, but from the investors' expressions, it is clear that patience for the "burning money" model waiting for commercialization is wearing thin compared to the first quarter.

Meta is currently instilling confidence in investors by categorizing AI investments into core AI and generative AI, to measure return on investment (ROI). The former may have a higher early ROI as it aims to enhance typical business performance such as ad recommendations. The latter is still in its early stages, but the management is optimistic about long-term opportunities based on its strong product portfolio (such as Meta AI Assistant, AI Studio, open-source LLM model Llama, potential applications in the metaverse, etc.).

However, this "burning money" strategy is undoubtedly beneficial for shovel stocks like NVIDIA, making performance expectations more solid. Indeed, following AMD's shipment guidance exceeding expectations, NVIDIA's stock price also surged by over 12% overnight.

Looking at the capital expenditure amounts of various companies, due to the construction of AI infrastructure, this quarter saw year-on-year and quarter-on-quarter growth in capital expenditures for Google, Meta, and Microsoft. In terms of guidance, Meta and Microsoft both stated that capital expenditures for the 2025 fiscal year will be higher than those of 2024. Google, on the other hand, appeared relatively conservative, indicating that capital expenditures for the next two quarters will be on par with or higher than Q1 ($12 billion). As for Meta, after significantly raising the upper limit of capital expenditures in the first quarter, they only raised the lower limit this quarter and stated that there will be no further increase in spending limits for the year.

Overall, the momentum of AI remains strong, with companies maintaining high levels of capital expenditure and adjusting expenditure guidance to varying degrees.

- Google: Q2 2024 capital expenditure was $13 billion (up 10% quarter-on-quarter, 91.3% year-on-year), with the company guiding that capital expenditure for each quarter of the year will roughly remain at or above the Q1 level ($12 billion).

- Meta: Q2 2024 capital expenditure was $8.47 billion (up 26% quarter-on-quarter, 33.3% year-on-year), with the company revising its full-year capital expenditure guidance from the previous range of $35-40 billion to between $37-40 billion. Additionally, the company expects a significant increase in capital expenditure for 2025.

- Microsoft: Q2 2024 capital expenditure was $19 billion (up 35.7% quarter-on-quarter, 78% year-on-year, in line with the expected $15 billion), with the company guiding that capital expenditure for the 2025 fiscal year will be higher than that of 2024

Hard AI has previously analyzed the financial reports of Google and Microsoft for this quarter. Now let's take a look at Meta's performance in the second quarter —

Overall, Meta's revenue and profit for 2024 Q2 exceeded expectations. This is partly due to AI driving growth, as well as cost optimization measures such as department restructuring and personnel optimization.

In terms of revenue, advertising revenue from the Asia-Pacific region continued to grow strongly this quarter, at 28%, but at a slower pace than the 41% in the first quarter. The company stated that this was due to a phase of adjustment in demand growth from Chinese advertisers, which had been strong. Similarly, Google was also affected this quarter, with a decrease in advertising revenue growth. Management explained that this was due to the high base effect from last year when Asia-Pacific e-commerce advertising started to ramp up.

Regarding capital expenditures, the company mentioned that both overinvestment and missed opportunities pose risks. However, compared to overinvestment, the company expressed a greater reluctance to face the risk of missed opportunities. They have raised this year's capital expenditure guidance from $35 billion to $40 billion to $37 billion to $40 billion, while expecting a significant increase in capital expenditures next year.

Specifically —

1. Revenue and profit both exceeded expectations: Total revenue was $39.071 billion (up 22% year-on-year, consensus expectation $38.3 billion), with a net profit of $13.465 billion (up 73% year-on-year, consensus expectation $12.3 billion).

2. Increase in ad impressions and average ad prices: Ad impressions and average ad prices both increased by 10% this quarter.

3. Continued growth in user base: The Family of Apps had a daily active user base of 3.27 billion this quarter (up 6.5% year-on-year). WhatsApp has now surpassed 100 million monthly active users in the U.S. (approximately 30% of the total U.S. population), and Threads is also close to reaching 200 million monthly active users (up from 150 million in the previous quarter).

4. Developing Llama 4: The company mentioned that the computational power required to train Llama 4 may be nearly 10 times that of training Llama 3, and future models will continue to surpass this level. For large companies like Meta, both overinvestment and missed opportunities are risks. However, the company stated that compared to overinvestment, they are more unwilling to face the risk of missed opportunities.

5. Consumer spending contributes most to ad revenue, followed by gaming and entertainment: The company revealed that in ad revenue, the online commerce vertical was the largest contributor to year-on-year growth, followed by gaming and entertainment, as well as media. Advertising revenue from the Asia-Pacific region showed the strongest growth at 28%, but at a slower pace than the 41% in the first quarter, mainly due to the current phase of adjustment in demand growth from Chinese advertisers.

6. Boosting AI, raising capital expenditures: The company stated that in order to support AI development, they will continue to expand capital expenditures. They have raised this year's capital expenditure guidance from $35 billion to $40 billion to $37 billion to $40 billion, while expecting a significant increase in capital expenditures next year

1. 2024Q2 Meta Financial Situation

Overall, both revenue and profit exceeded expectations. Especially, net profit significantly surpassed consensus expectations, with a year-on-year growth of 73%.

1. Total revenue was $39.071 billion (up 22% year-on-year, consensus expectation $38.3 billion);

2. Operating profit was $14.847 billion (up 58% year-on-year, consensus expectation $14.59 billion), corresponding to an operating profit margin of 38% (up 9 percentage points year-on-year).

3. Net profit was $13.465 billion (up 73% year-on-year, consensus expectation $12.3 billion), with free cash flow of $10.898 billion, and diluted earnings per share of $5.16 (up 73% year-on-year);

Q3 2024 guidance: Total revenue is expected to be between $38.5 billion and $41 billion.

In terms of capital expenditure, it is expected that the full-year capital expenditure for 2024 will be between $37 billion and $40 billion, updated from the previous range of $35 billion to $40 billion. Capital expenditure for 2025 is expected to increase significantly as we invest in supporting our AI research and product development work.

Regarding dividends and buybacks, the company repurchased $6.32 billion of Class A common stock during the quarter and distributed $1.27 billion in dividends.

2. 2024Q2 Meta Segment Revenue

Family of Apps revenue was $38.718 billion, up 22% year-on-year; Reality Labs revenue was $0.353 billion, up 28% year-on-year.

1) Reasons for the Growth in Family of Apps Revenue

- Increase in user base attracting more advertisers: This quarter, the daily active users of Family of Apps reached 3.27 billion (up 6.5% year-on-year). Among them, WhatsApp has now exceeded 100 million monthly active users in the United States (approximately 30% of the total U.S. population), and Threads is also about to reach 200 million monthly active users (up from 150 million in the previous quarter);

- Increase in ad impressions and average ad prices: Ad impressions and the average price per ad both increased by 10% this quarter;

- AI empowering precise ad targeting: The business platform integrated Llama 3.1 released by Meta in the second quarter, further enhancing the performance of the ad recommendation system;From the perspective of advertising revenue contribution, the online business vertical field is the largest contributor to year-on-year growth, followed by gaming and entertainment, as well as media. In terms of regions, advertising revenue growth from the Asia-Pacific region is the strongest at 28%, but the growth rate is lower than the 41% in the first quarter, as it is currently in a phase of adjustment due to the strong demand growth from Chinese advertisers.

2) Reasons for the Growth of Reality Labs

- Revenue: The revenue of the Reality Labs department is $353 million, a year-on-year increase of 28%, mainly due to the increase in sales of Quest headsets;

- Expenses: The expenses of the Reality Labs department are $4.8 billion, a year-on-year increase of 21%, mainly due to the increase in personnel costs and inventory costs;

Despite the strong sales of Quest 3, the operating loss of the Reality Labs department remains significant. Meta stated that although the company restructured and reduced costs for the Reality Labs department in the second quarter, the company will continue to increase its investment in Reality Labs, and it is expected that the operating loss of Reality Labs will continue to increase in the coming years.

2024Q2 Meta Earnings Call

1. Significant Growth in Family of Apps Users: This quarter, daily active users reached 3.27 billion (up 6.5% year-on-year). Among them, WhatsApp has now exceeded 100 million monthly active users in the United States (about 30% of the total U.S. population), and Threads is also close to reaching 200 million monthly active users (up from 150 million in the previous quarter).

2. Developing Llama 4: The company stated that the computational power required to train Llama 4 may be nearly 10 times that of training Llama 3, and future models will continue to surpass this level. For large companies like Meta, both overinvestment and missed opportunities are risks. However, the company stated that compared to overinvestment, it is more unwilling to face the risk of missing opportunities.

3. Better-Than-Expected Performance of Reality Labs: The company stated that sales of Ray-Ban Meta glasses and Quest 3 this quarter were better than expected, with revenue increasing by 28% year-on-year. However, losses continue, operating profit remains negative, departmental expenses increased by 21% year-on-year, mainly due to increased personnel-related expenses and increased inventory costs for Reality Labs4. Increase in capital expenditures leads to higher operating costs: This quarter, capital expenditures amounted to $8.47 billion, a year-on-year increase of 33.4%, resulting in a 23% increase in operating costs. The company stated that in order to support AI development, it will continue to expand capital expenditures. The full-year 2024 capital expenditure guidance has been raised from $35 billion to $40 billion to $37 billion to $40 billion, with a significant increase expected in capital expenditures next year.

5. Consumer contributions mainly come from advertising revenue, followed by games and entertainment: The company revealed that in terms of advertising revenue, the online commerce vertical was the largest contributor to year-on-year growth, followed by games and entertainment, and media. Advertising revenue from the Asia-Pacific region showed the strongest growth at 28%, lower than the 41% in the first quarter, mainly due to a pullback in demand from Chinese advertisers who were experiencing strong growth last year (similar to the impact seen by Google this quarter, with YouTube's growth rate dropping from 21% in Q1 to 13% in Q2, attributed by management to the high base from last year when Asia-Pacific e-commerce advertising was just starting to ramp up).

6. Increase in ad impressions: Ad impressions and average ad prices per ad both increased by 10% this quarter. The increase in impressions was mainly driven by the Asia-Pacific region and other regions around the world; pricing growth was mainly due to increased demand from advertisers, partly attributed to improved ad effectiveness (AI empowerment).

7. Meta AI has reached billions of queries: Since the launch of Meta AI, the number of queries has accumulated to billions. Currently, Meta AI supports over 20 countries and 8 languages.

8. 24Q3 guidance: Total revenue is expected to be between $38.5 billion and $41 billion.

Analysis of Meta's Performance in 2024Q2

1. Revenue and Net Profit: Both exceeded market expectations, especially net profit, which grew by 73% year-on-year.

- Revenue: $39.071 billion (up 22% year-on-year, consensus estimate $38.3 billion);

- Net Profit: $13.465 billion (up 73% year-on-year, consensus estimate $12.3 billion);

Reasons for Revenue Growth ——

1) Growth in advertising revenue: The growth in advertising revenue was mainly driven by the increase in ad impressions and the average price per ad.

2) Increased demand from advertisers: The increase in demand from advertisers, partly due to improved ad effectiveness;

3) Growth in WhatsApp Business Platform: The growth in business messaging revenue from the WhatsApp Business Platform also contributed to the overall revenue growth;

4) Strong sales of Quest 3: Despite Meta Reality Labs still being in a loss-making state, the strong sales of Quest 3 also contributed to the growth in total revenue;

Reasons for Net Profit Growth ——

1) Revenue growth: Strong revenue growth was the main driver of profit growth;2) Cost Control: Through department restructuring and personnel optimization, the company's marketing and sales costs decreased by 14%, and administrative expenses decreased by 12%;

3) Efficiency Improvement from AI Strategy: The implementation of the AI strategy has also improved Meta's operational efficiency, such as optimizing advertising placements, which has also contributed to profit growth.

2) Operating Profit Margin

The improvement in operating profit margin is mainly due to the company:

• Reducing marketing and sales costs: Marketing and sales costs decreased by 14%, mainly benefiting from restructuring and streamlining of personnel.

• Reducing administrative expenses: Administrative expenses decreased by 12%, mainly benefiting from reducing legal-related expenses.

• Controlling Reality Labs Costs: Reality Labs department expenses increased by 21%, but Meta is working hard to control costs, for example, by improving operational efficiency and inventory management.

3) Advertising Revenue Growth by Region

• Advertising revenue in the Asia-Pacific region grew the fastest, reaching 28%, but the growth rate was lower than the previous quarter's 41%, mainly due to the strong demand from Chinese advertisers in the previous quarter, while growth slowed this quarter;

• Advertising revenue growth rate in Europe was 26%, higher than North America's 17%;

• Advertising revenue growth rates in other global regions and Europe were the highest, reaching 33% and 26% respectively;

4) Capital Expenditure: Capital expenditure for this quarter was $8.47 billion, a year-on-year increase of 33.4%.

Boosting AI, continuous upward adjustment of capital expenditure guidance: The company has raised its Capex guidance for this year from $35-40 billion to $37-40 billion, while expecting a significant increase in capital expenditure next yearFor large companies like Meta, both excessive investment and missed opportunities are risks. However, compared to excessive investment, the company is more unwilling to face the risk of missing opportunities.

• Capital expenditure for the quarter: Capital expenditure for the quarter was $8.47 billion, mainly used for investments in servers, data centers, and network infrastructure.

• Expected annual capital expenditure: Meta expects its capital expenditure for the full year of 2024 to be between $37 billion and $40 billion, higher than the previous estimate of $35 billion to $40 billion.

• Future capital expenditure plans: Meta stated that they plan to continue increasing capital expenditure in 2025 to support their AI research and product development.