Deepwater's Gene Munster on his takeaways from Meta's investor call

Key Concepts

• Revenue Growth vs. Expense Growth: The core dynamic impacting Meta's stock performance.
• Capital Expenditure (Capex): Significant investments in infrastructure, particularly for AI.
• AI Infrastructure: Building capacity to support the most optimistic scenarios for AI development and adoption.
• Engagement Growth: Increasing daily active users and usage rates across Meta's platforms.
• Street Expectations: The market's current projections for revenue and expense growth.
• Recalibration: Investors adjusting their expectations and valuations based on new information.

Meta's Stock Performance and Expense Dynamics

The discussion centers on Meta's recent stock performance, particularly its decline despite beating earnings estimates. The primary driver identified for this drop is a significant shift in the balance between revenue growth and expense growth.

• Past Performance (Last Two Years): Meta consistently grew revenue at a faster pace than expenses. For example, in 2024, revenue growth was approximately 23% while expense growth was around 8%. In the first two quarters of the current year, revenue grew by 20% and expenses by 12%.
• Recent Quarter (September Quarter): This trend reversed. While revenue growth remained strong at 23%, expense growth surged to 32%.
• Future Outlook: Commentary suggests a substantial increase in third-party capital expenditure (capex) for the upcoming year. Projections indicate revenue growth of around 18% (slightly above the street's 16% estimate) but with expenses growing north of 30%. This "flipped script" is seen as the primary reason for investor concern.

Ambitions in AI and Capital Expenditure

Meta's ambitious plans for Artificial Intelligence (AI) are a significant factor, leading to increased capital expenditure.

• Zuckerberg's Vision: Mark Zuckerberg is described as setting himself up to be the "most optimistic" CEO regarding AI's transformative potential.
• Capex Projections:
  • Meta's capex is expected to increase significantly, potentially by more than 60% (compared to street expectations of 40% growth for 2026).
  • In comparison, Google is guiding for a 25% increase in capex, with Microsoft and Amazon around similar figures.
• "Most Optimistic Case": A notable quote from Zuckerberg stated, "We're building our AI infrastructure for the most optimistic, that was his word, the most optimistic case for AI." While seen as the right strategic move, this statement is also described as "unsettling" for investors due to its ambitious nature.

Investor Reaction and Expectations for a Return

The market's reaction to Meta's financial disclosures is characterized by a need for recalibration.

• "Pause" vs. "Shift": While a "pause" in stock performance after significant outperformance might be understandable, the "expense shift" is considered a new and concerning development.
• One-Time Charge: A $15 million tax charge is dismissed as insignificant and not a primary driver of the stock's decline.
• Street's Need for Improvement: Investors need to see a return on investment in the coming quarters.
  • December Quarter: Improvement is expected in the December quarter, with revenue growth rates slightly higher than anticipated and expenses hopefully lower.
  • Revenue Growth Target: The street is at 16% for Meta's next year's top-line growth. The speaker suggests it needs to be closer to 20% to demonstrate that AI investments are effectively driving revenue.
• AI as a Revenue Driver: Meta is highlighted as a leading example of a company at scale using AI to accelerate revenue growth, and this needs to be consistently demonstrated.

Logical Connections and Conclusion

The discussion logically connects Meta's aggressive AI ambitions, evidenced by substantial capex increases, with the market's concern over the resulting surge in expenses. The past success of Meta in outgrowing expenses has created an expectation that has now been challenged. Investors are seeking tangible proof in upcoming quarters that these significant investments will translate into accelerated revenue growth, justifying the "most optimistic" outlook for AI. While the long-term opportunity is acknowledged, the immediate need for quarterly performance improvements to regain investor confidence is emphasized. The speaker believes the stock will eventually reverse these losses, but the street needs to see a clear demonstration of the investment's efficacy.