Wall Street hates Meta’s AI spending guidance raise. We don’t
Shares of Meta Platforms took a hit in extended trading on Wednesday after management raised expense guidance and levied a large tax charge. According to LSEG, revenue rose 26% year over year to $51.24 billion in the three months ended Sept. 30, easily beating the $48.14 billion consensus estimate. Adjusted earnings per share were $7.25, compared to expectations of $6.69, according to LSEG data. That earnings figure does not include a one-time income tax charge of about $16 billion, or $6.20 per share, resulting from the implementation of President Donald Trump’s One Big Good Bill Act. Bottom Line: Given the non-recurring nature of the expense and CFO Susan Li’s assurance on the post-earnings conference call, we don’t think the 7.5% decline in the stock was due to the tax change. “We continue to expect that we will realize significant cash tax savings for the remainder of the current year and future years under the new law, and this quarter’s charge reflects the total impact expected from the transition to the new U.S. tax law,” Li said. he said. More accurately, the pressure on the stock was almost certainly due to management’s increase in expense guidance for the remainder of 2025; Li reiterated his previous comment that “dollar growth in capital spending will be significantly larger in 2026 than in 2025, and growth will be driven mainly by infrastructure costs, including increased cloud expenses and depreciation.” Management also noted in the statement that total expense growth is also expected to “increase at a significantly faster percentage rate in 2026 than in 2025.” META YTD mountain Meta Platforms YTD We understand the capex concerns as the market tries to figure out what the long-term return is on these terrible AI-focused investments. But management needs to handle things well, thanks to its discretion and ability to adapt to the course of events. To this point, CEO Mark Zuckerberg said in the call: “The right strategy [is] to aggressively build bootstrap capacity. Thus, we are prepared for the most optimistic situations. That way, if superintelligence emerges sooner, we’ll be ideally positioned for a generational paradigm shift with many major opportunities.” In AI terms, superintelligence is when computers become smarter than humans. Zuckerberg added: “If so [superintelligence] If it takes longer to achieve this, we will use the extra computing to accelerate our core business, which continues to profitably use much more computing than we can spend. We are also seeing very high demand for additional computing, both internally and externally. And in the worst case, we’ll slow down building new infrastructure for a while as we grow into what we’re building.” The fact that Meta can profitably leverage more computing than it already has should put some investors’ minds at ease when it comes to big expenses. Meta will find use for all the infrastructure it builds in one way or another. It’s better to have it and not need it now than to need it now and not have it. While there’s always the potential for return on investment (ROI) to occur more slowly than expected or at a lower rate, it’s still positive over time Meta Platforms dominates the world of targeted ads with excellent technology, and strong user engagement makes it a great place to advertise. The company’s scale provides the financial muscle and employee talent needed to pursue new growth paths like AI Competitors: Alphabet, TikTok and Snap Weight in portfolio: 4.69% Last purchase: September 6, 2022 Start date: May October 29, 2014 With these internal safety nets in place, the potential opportunity is too great to pass up and the risks are too high. The upside for both our existing apps and the new products and businesses that have become possible to build across Facebook, Instagram and Threads are delivering higher quality and more relevant content, which led to 5% more time spent on Facebook and 10% more on Topics in Q3. Video is a particular bright spot, with video time spent on Instagram increasing by more than 30% year-to-date.” There really wasn’t much to consider in the third quarter report, other than one-off earnings and spending dynamics that we think the Street is looking past. Actually, everything else was amazing. Revenue in both segments beat expectations, Application Family operating income came in better than expected, and operating losses in Reality Labs were approximately $700 million less than expected. Sales were better than expected across all geographies, with Engagement represented by Family Daily Active People, as well as Family Average Per Capita Income, remaining marginally smaller due to increased capital expenditure, but more or less in line with expectations thanks to a solid breakthrough in operating cash flow. We reiterate our Meta price target of $825 per share and discuss whether to upgrade the stock to our buy-equivalent 1 rating. We should note that while this was down after launch, it was up 28% year-on-year as of Wednesday’s close. Quarterly highlights While Zuckerberg said that Instagram has reached 3 billion monthly active users and that it is “on its way to becoming a leader in its category”, Zuckerberg noted the following during the meeting: “The annual operating rate continues [Meta’s] fully end-to-end AI-powered advertising tools have surpassed $60 billion.” Meta AI has more than 1 billion monthly active users, and the team is seeing usage increasing as key models improve. The new Meta Ray-Ban and Oakley smart glasses are selling well. Zuckerberg said the new Meta Ray-Ban display glasses “sold out in nearly every store within 48 hours, and demo slots are fully booked by the end of next month.” Total ad impressions across all services are down from last year, Li said. Up 14% “Healthy driven by engagement and user growth across all regions, particularly in video services.” In terms of cash returns to shareholders, Meta returned $3.2 billion to shareholders through share buybacks and another $1.3 billion through dividends. As previously noted, LSEG Management raised the lower end of its full-year capital expenditure forecast to $72 billion, from the previous range of $66 billion, according to FactSet. It also rose to $116 billion from $114 previously, according to FactSet. (Jim Cramer’s Charitable Trust is a long META. See here for a full list of stocks.) As a subscriber to the CNBC Investment Club with Jim Cramer, Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable foundation’s portfolio. If he has talked about the stock, he waits 72 hours after giving the transaction alert before executing the transaction. 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