Meta beats expectations but legal penalties hit profit

Meta exceeded revenue predictions for the third quarter, but its profits were significantly impacted by a $18 billion legal settlement with most US states. The company reported $9.86 billion in profits for the July-September period, roughly 50% below what investors anticipated, primarily due to a $9.9 billion charge related to the settlement.

Meta disclosed this earnings report shortly after a new financial penalty was announced in New Mexico, where a judge ordered the social media giant to pay $25 billion following a jury finding that Meta had misled users in a case connected to the Cambridge Analytica scandal.

During a call with analysts, CFO Susan Li emphasized that Meta remains vigilant in monitoring active legal and regulatory matters that could substantially affect its business and financial results. The company continues to face multiple youth-related trials in the coming months in the United States.

Meta has been heavily investing in artificial intelligence (AI) capabilities, and investors are eagerly awaiting signs that these investments are yielding positive results. CEO Mark Zuckerberg disclosed that Reality Labs, Meta's hardware division, is working on AI-powered devices, such as glasses, and expects improvements in the company's bottom line from that sector.

In September, Meta introduced several new AI wearables, including a camera-free smart glasses model, amidst global concerns about privacy and the filming of women and girls without consent. The company's AI model, Muse, will serve as the centerpiece of their wearable vision.

During Connect, Meta unveiled the Muse Charm, a tamagotchi-like AI device that allows users to interact with their Muse agent, an autonomous AI assistant, separately from a smartphone. Meta already has 10 million users utilizing its Muse model in the US and Canada. However, AI models require substantial computing power, fueling an industry-wide race to construct data centers worldwide.

In the September quarter, Meta spent $35 billion on capital expenditures, which was below investor expectations of $41 billion. The company has allocated over $85 billion to capital expenditures this year.

Meta announced the issuance of a new class of stock, which would not carry voting rights, enabling the company to raise additional funds for its ambitious AI roadmap. This move might also serve as leverage to ensure Mark Zuckerberg remains in California. Meta expressed concerns that Zuckerberg's voting power could drop to approximately 53% if he needs to sell a significant portion of his shares to cover increased taxes due to Proposition 40, a controversial billionaire wealth tax that could pass in California during the November election.

Shareholders would receive one new Class C stock for each existing share they hold, potentially allowing Zuckerberg to sell these shares to pay the tax without reducing his voting power.