Meta (META) continues to deliver solid results amid strong digital advertising demand while investing aggressively in AI-related infrastructure, technology, and products. The firm tightened its capital spending forecast to the upper end of its previous expectations and said that investment growth will be “significant” in 2025.
• Fair Value Estimate: $450
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
Meta reiterated that it believes the computing capacity it is building can be used for various tasks, with the flexibility to shift wherever the best opportunities emerge, a similar view that Alphabet has shared. We aren’t convinced Meta will earn strong returns on its infrastructure investment, but we expect the firm will continue to generate strong cash flow regardless of the direction AI takes. We were also pleased the firm maintained its expense forecast for the year. We are increasing our fair value estimate to $450 from $400.
Revenue increased 22% to $39.1 billion during the second quarter, beating the high end of management’s forecast. User growth slowed a bit, with daily family-of-apps users expanding less than 1% sequentially for the first time in two years, reaching 3.27 billion. Ad impression growth slowed sharply to 10% year over year from 20% last quarter, but this deceleration primarily reflects a surge in impressions last year – volume growth on a two-year and three-year basis has held fairly steady over the past several quarters. Ad pricing was impressive, increasing 10% year over year. Meta indicated that ad demand was broad-based across geographies and industries, but again pointed to strong demand among retailers, especially those based in Asia, as the biggest growth driver.
Meta’s Capital Spending Keeps Rising
The operating margin held steady with the prior quarter at 38%, up from 29% a year ago, thanks to lower restructuring costs and operating leverage against R&D, marketing, and overhead costs. While capital investment increased to $8.2 billion from $6.1 billion a year ago, free cash flow increased nearly 20% to $13.2 billion during the quarter.
CEO Mark Zuckerberg continues to believe that Meta has massive opportunities around AI that will take years to develop. Meta AI and the ability to develop customer service agents for businesses remain the near-term opportunities the firm is most excited about. Meta believes Meta AI is on pace to be the most used AI assistant globally, and noted that the service has gained strong adoption in India alongside WhatsApp. The integration of AI into Ray-Ban glasses has also exceeded the firm’s expectations, and it hasn’t been able to meet demand. These opportunities remain very small relative to Meta’s massive advertising business. We continue to expect AI’s biggest impact on the firm will come from improvements the technology provides to the user experience and the ability of advertisers to reach targeted audiences.
