Wall Street hates Meta’s AI spending guidance raise. We don’t
Meta Platforms shares were taking a beating in extended hours trading on Wednesday after management raised its expense guidance and took a massive tax charge. Revenue in the three months ended Sept. 30 climbed 26% year over year to $51.24 billion, easily outpacing the consensus estimate of $48.14 billion, according to LSEG. Adjusted earnings per share came in at $7.25 versus the $6.69 consensus, LSEG data showed. That earnings number does not include a nearly $16 billion, or $6.20 per share, one-time income tax charge due to the implementation of President Donald Trump’s One Big Beautiful Bill Act. Bottom line Given the non-recurring nature of the charge and reassurances from CFO Susan Li on the post-earnings conference call, we don’t think the stock’s 7.5% decline is due to the tax change. Li said, “We continue to expect we will recognize 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 expected impact from the transition to the new U.S. tax law.” Rather, the pressure on the stock was almost certainly due to management’s expense guidance raise for the remainder of 2025, with Li reiterating prior commentary that capital expenditure “dollar growth will be notably larger in 2026 than 2025, with growth primarily driven by infrastructure costs, including incremental cloud expenses and depreciation.” Total expense growth is also expected to “grow at a significantly faster percentage rate in 2026 than 2025,” management also noted on the release. META YTD mountain Meta Platforms YTD We understand the capex concerns as the market tries to figure out what the long-term return on these monstrous artificial intelligence-driven investments is. But management has a good handle on things, with optionality and the ability to adapt depending on how things play out. To this point, CEO Mark Zuckerberg said on the call, “The right strategy [is] to aggressively frontload building capacity. So, that way we’re prepared for the most optimistic cases. That way, if superintelligence arrives sooner, we will be ideally positioned for a generational paradigm shift in many large opportunities.” In AI terms, superintelligence is when computers become smarter than humans. Zuckerberg added, “If it [superintelligence] takes longer to achieve, then we’ll use the extra compute to accelerate our core business, which continues to be able to profitably use much more compute than we’ve been able to throw at it. And, we’re seeing very high demand for additional compute, both internally and externally. And, in the worst case, we would just slow building new infrastructure for some period while we grow into what we build.” That Meta can profitably leverage even more compute than it already has should ease the minds of some investors when it comes to the massive spending. Meta is clearly going to find use for all the infrastructure it’s building, one way or another. It’s better to have it and not need it immediately than need it immediately and not have it. While there is always the potential for return on investment (ROI) to materialize more slowly than expected or at a lower rate, it should nonetheless be positive over time. Why we own it Meta Platforms dominates the world of targeted ads with excellent technology, and its strong user engagement makes it a great place to advertise. The company’s scale provides the financial power and employee talent needed to pursue new growth avenues such as artificial intelligence. Competitors : Alphabet , TikTok, and Snap Weight in portfolio : 4.69% Most recent buy : Sept. 6, 2022 Initiated : May 29, 2014 With these internal safety nets in place, the team is right to front-load the spending as the potential opportunity is simply too big to miss, and the stakes are simply too high. When technology as consequential as AI comes around, it’s either get with the program and fight to lead the way, or risk being disrupted by those who are willing to spend, which, at this point, is just about everyone. On the call, Zuckerberg further explained the internal benefits of building out more AI infrastructure. “The upside is extremely high for both our existing apps and new products and businesses that are becoming possible to build across Facebook, Instagram, and Threads. Our AI recommendation systems are delivering higher quality and more relevant content, which led to 5% more time spent on Facebook in Q3 and 10% on Threads. Video is a particular bright spot, with video time spent on Instagram up more than 30% since last year.” Outside of the one-time earnings hit – which we think the Street is looking past – and the spending dynamics, there really wasn’t much to take issue with in the third quarter report. In fact, everything else was fantastic. Revenue in both segments outpaced expectations, while the Family of Apps operating income came in better than expected, and the operating loss at Reality Labs was nearly $700 million less than expected. Sales were better than expected across all geographies. Engagement, as represented by Family Daily Active People, was well ahead of expectations, as was Family Average Revenue per Person. Free cash flow came up a hair short on the back of elevated capex, but was pretty much in line thanks to a solid beat on operating cash flow versus expectations. We’re reiterating our Meta price target of $825 per share and discussing whether to upgrade the stock to our buy-equivalent 1 rating. We currently have it as a 2 rating, which means look to buy on a pullback. We have to consider that while down after the release, the stock was up 28% year to date as of Wednesday’s close. Quarterly highlights Instagram reached 3 billion monthly active users, while Threads recently passed 150 million daily actives with Zuckerberg saying it “remains on track to become the leader in its category.” Reels reached an annual revenue run rate of over $50 billion. On the call, Zuckerberg noted the “annual run rate going through [Meta’s] completely end-to-end AI-powered ad tools has passed $60 billion.” Meta AI has over 1 billion monthly active users, with the team seeing increased usage as the underlying models improve. New Meta Ray-Ban and Oakley smart glasses are selling well. Zuckerberg said the new Meta Ray-Ban display glasses “sold out in almost every store within 48 hours, with demo slots fully booked through the end of next month.” Total ad impressions across all services increased 14% year over year, with Li saying it was “healthy across all regions, driven by engagement and user growth, particularly on video services.” Average price per ad increased 10% year over year. Regarding cash returns to shareholders, Meta returned $3.2 billion to shareholders via share repurchases and another $1.3 billion via dividends. Guidance Meta expects current fourth-quarter revenue in the range of $56 billion to $59 billion, which even on the low end, easily surpasses the consensus expectation of $54.95 billion, according to LSEG. Management, as mentioned earlier, raised the lower end of its full-year capital expenditures forecast. They are now targeting between $70 billion and $72 billion, up from the prior range of $66 billion to $72 billion. This new range is above the $68.36 billion consensus estimates, according to FactSet. Meta also raised the lower end of its 2025 total expenses guidance to between $116 billion to $118 billion, up from the prior range of $114 billion to $118 billion. This, too, appears to be above expectations of $114.9 billion, according to FactSet. (Jim Cramer’s Charitable Trust is long META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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