"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, and strong engagement (Facebook, Instagram)."
"We understand investor fears around investments in AI. After a scarring Reality Labs misallocation of capital, investors are again doubting Meta's capital allocation strategy for AI. We are not as pessimistic. From a strategic perspective, we think it is important that Meta invests in its own foundation models. Simply put, the costs of running someone else's model at Meta's scale are not economically feasible and would cause material margin compression."
"The bottom line: We maintain our $850 fair value estimate for wide-moat Meta, with the firm's strong performance offset by the higher-than-expected capital and operating expenditures commentary for 2026. With shares trading down after hours, we continue to view them as undervalued."
Meta reported third-quarter sales up 26% to $51 billion and operating margins contracting 300 basis points to 40% as AI-related costs rose year over year. Capital expenditures, mostly on AI, are expected to exceed $100 billion next year. The ad business improved through increased engagement, monetization, ad inventory expansion via Threads and WhatsApp, and user growth to 3.54 billion daily users, up 8%. AI investments improved ad targeting and returns, driving a 10% increase in ad prices. Morningstar maintains a $850 fair value estimate for Meta, citing strong performance offset by higher capital and operating spending.
Read at global.morningstar.com
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