"Meta reported solid third-quarter earnings, with sales up 26% to $51 billion and operating margins contracting 300 basis points to 40%, as artificial intelligence-related costs rose year over year. The firm indicates that its capital expenditures, mostly on AI, will be over $100 billion next year. Why it matters: Meta's ad business continues to perform exceptionally well, with management attributing improvements in engagement and monetization to the firm's increased use of AI, as well as continued ad inventory (Threads, WhatsApp) growth,"
"Meta has two primary levers of driving ad sales: volume and price. On volume, the firm can increase its ad inventory, that is, the number of ads shown, by adding more surfaces and by increasing its user count. To this end, we saw an impressive 8% growth in daily users to 3.54 billion. On price, we see Meta's AI investments as key to driving higher value to advertisers via improved ad targeting and higher returns on ad spending, which then drives higher ad prices."
Meta reported third-quarter sales up 26% to $51 billion and operating margins contracted 300 basis points to 40% due to higher AI-related costs. The firm plans capital expenditures mostly on AI exceeding $100 billion next year. The ad business performed strongly with improved engagement and monetization attributed to increased AI use, expanding ad inventory (Threads, WhatsApp), and high engagement on Facebook and Instagram. Daily users grew 8% to 3.54 billion. AI investments improved ad targeting and returns, contributing to a 10% increase in ad prices. Fair value is maintained at $850, with higher capex and operating expenses offsetting performance. Investing in proprietary foundation models is considered necessary to avoid margin compression from running external models at Meta's scale.
Read at www.morningstar.com
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