Meta Pulls Back From Highs as AI Capex Clouds a Still-Strong Cash Flow Story

Core Viewpoint - Meta is positioned as a strong investment opportunity with a robust revenue growth trajectory, despite challenges in capital expenditure and the metaverse segment [1][17]. Financial Performance - Meta's current stock price is approximately $667.55, with a market cap of about $1.68 trillion and a trailing P/E ratio of roughly 29.5 [1]. - The company reported around $189 billion in revenue, approximately $81.9 billion in operating income, and roughly $42.7 billion in free cash flow [6][16]. - Operating margins are maintained above 40%, with EPS around $7.25, exceeding consensus estimates by about sixty cents [2][6]. Revenue Growth and Business Model - Meta's family of apps, including Facebook, Instagram, WhatsApp, and Messenger, reached a quarterly revenue of over $51 billion, with about $50.8 billion coming from the family of apps [2]. - Revenue growth is approximately 26% year-over-year, driven by higher yield per impression and increased video consumption, particularly on Instagram [2]. - The company has seen a 10% increase in ad prices while impressions grew by about 14%, indicating strong pricing power [2]. AI and Technology Investments - Meta is investing heavily in AI, with a projected capex of around $70–72 billion for 2025, which is over 30% of expected full-year revenue [7]. - The introduction of the Lattice system consolidates multiple models into a unified framework, enhancing ad targeting and performance [4]. - The Advantage+ system is tracking at about $60 billion in annualized revenue, demonstrating the monetization potential of Meta's AI capabilities [4]. Challenges and Strategic Focus - The Reality Labs segment has incurred operating losses of approximately $18–19 billion over the last four quarters, impacting overall profitability [9]. - Management is considering budget cuts of around 30% for the Metaverse unit, which could lead to annual savings of $5–6 billion [9]. - Regulatory pressures and competition from other platforms like TikTok and Snap remain ongoing challenges [12]. Valuation and Market Outlook - Current valuation suggests a target price of around $750, representing a potential upside of 12–15% from current levels [15]. - A more optimistic scenario could see the stock valued between $865 and $925, while a bearish case could drop the valuation to around $520–540 [15]. - The overall assessment indicates that the base and mild bull scenarios are more probable than a deep bear scenario, provided management maintains focus on ROIC and cost discipline [15][17].