Meta Platforms Faces Growing Challenges Despite Robust Revenue Growth and High Profits

180

Meta Platforms Inc. (META.O), the parent company of Facebook, continues to demonstrate remarkable financial strength, with its market capitalization standing at an impressive $1.2 trillion. In the second quarter of this year, Meta reported a 22% year-over-year increase in revenue, reaching $39 billion. This growth rate is nearly double that of its major competitor Alphabet Inc. (GOOGL.O). However, this success is driven more by enhanced monetization strategies rather than a significant increase in user numbers.

Despite these impressive revenue figures, Meta’s growth in key performance metrics, such as engaged users and ad impressions, showed signs of deceleration during the three-month period ending in June. Daily active users across its platforms, including Facebook and Instagram, remained relatively stable compared to the previous quarter. Additionally, the growth rate of ad impressions slowed considerably, down to one-third of the pace achieved in the previous year. Nevertheless, the average price per ad rose by 10%, and the company’s operating margin improved by 9 percentage points to 38%, leading to a substantial 73% increase in net income, which surpassed $13 billion.

The ongoing challenge for Meta is maintaining its advanced ad targeting capabilities, which necessitates extensive data collection. This has attracted the scrutiny of regulators, who are quick to impose fines for perceived violations. Recently, Meta agreed to a $1.4 billion settlement with the state of Texas over accusations related to the illegal use of facial-recognition technology, although the company denies any wrongdoing. Additionally, reports from Reuters suggest that Meta might face a $13 billion fine following charges by the European Commission for unfair advertising practices. Last year, Meta paid 1.2 billion euros to settle claims of privacy law violations in the European Union, and in 2019, the U.S. Federal Trade Commission imposed a record $5 billion fine related to data misuse.

As Meta’s scale continues to grow, the financial impact of these penalties may seem manageable. Estimates from LSEG suggest that Meta’s combined profit for 2024 and 2025 will exceed $110 billion, which would comfortably absorb these fines. Similar industries, such as banking, have also faced significant penalties; for example, Goldman Sachs (GS.N) has made several billion-dollar payouts.

However, the accumulation of regulatory challenges and public backlash could compound over time. Reports indicate that ads on Meta’s platforms may have inadvertently promoted illegal drug sales, leading to federal investigations into the company’s involvement in such activities. In response, Meta has stated that its business remains strong because advertisers leverage its services to grow and succeed. The company asserts that it has strict advertising policies and actively rejects hundreds of thousands of ads that violate these rules. Nevertheless, investors may eventually become concerned about the growing cycle of profits being offset by regulatory fines.