Shares in Facebook parent company Meta surged after it reported a return to user growth, even though the company's profits dropped and sales growth slowed.

Shares in Facebook parent company Meta surged after it reported a return to user growth, even though the company's profits dropped and sales growth slowed. / AP

More people used Facebook in the first quarter than analysts expected, easing concerns about competition from TikTok that led the world's biggest social network to lose users for the first time ever last year.

Shares in Facebook parent company Meta surged on Wednesday afternoon after it released its latest earnings report – even though the company's profits dropped and sales growth was the slowest since it went public a decade ago.

Investors have been nervous about Facebook's growth since it last reported financial results in January showing its daily user base declined. That sparked Meta's worst ever day on Wall Street and has continued to drag down the stock price, slashing the company's market value by almost half since the beginning of the year.

At the time, CEO Mark Zuckerberg pointed the finger at TikTok, saying the wildly popular short video app is attracting users and advertising dollars quickly. His comments added to growing fears that Facebook and Instagram are losing traction among the next generation of internet users.

On Wednesday, Meta said daily active users of Facebook grew to 1.96 billion in the first three months of this year, ahead of Wall Street's estimates of 1.94 billion.

Zuckerberg said Facebook and Instagram are working on new products and features to compete with TikTok, including its copycat short video format Reels, which now makes up more than 20% of the time people spend on Instagram.

The company will also lean more heavily on artificial intelligence to recommend content to users on Facebook, even if it's not posted by their friends and family or other accounts they follow, the CEO said. That's similar to how TikTok's main "For You" page functions.

Despite the return to user growth, Meta's revenue expanded at the slowest pace since the company went public in 2012. Sales rose 7% to $27.9 billion, as Russia's war in Ukraine and Apple's new privacy settings, which make it harder for Meta to sell targeted ads, weighed on the company's advertising business.

Profit fell 21% to $7.5 billion. While that was better than analysts had expected, it was the second straight quarter of declining profit.

The financial strain highlights the challenges Meta faces as it shifts from its current focus on social networks to the so-called "metaverse," a set of immersive virtual experiences that Zuckerberg says is the future of the company.

Meta plans to spend heavily to build the necessary software and virtual reality hardware, and Zuckerberg has said it will be years before the metaverse is a fully realized business. In the first quarter, losses at its metaverse-focused Reality Labs division were almost $3 billion.

But Meta is finding other places to cut costs, and says it will spend $3 billion less overall this year than it originally anticipated.

"With our current business growth levels, we are now planning to slow the pace of some of our investments," Zuckerberg told analysts on a conference call on Wednesday. He said going forward, the goal is for Meta's existing social apps to generate enough profit to fund its spending on the metaverse.

Gene Munster, managing partner at venture capital firm Loup Ventures, said the results reflected the success Meta is already having in managing costs.

"This goes in the face of the narrative that the company is overspending," he wrote on Twitter.

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Tags: Facebook  meta  Mark Zuckerberg  social media