Rating & Price Target

Buy with a PT of $825. Which gives us about 10% upside from current levels. Meta continues to be the best platform at monetizing eyeballs in digital. We believe AI will continue to help their advertising platform generate higher yields as they sell more expensive inventory. Meta has fallen since their last print due to high AI spend weighing on profitability. We do not think this is harmful to the business in the long term. Main risk factors that would alter our thesis are if their AI advertising products do not continue to perform, how much spend impacts margin and what happens in the antitrust case.

Company Overview

Meta primarily generates revenue from ads on its platforms (Facebook, Instagram, WhatsApp and Messenger). This is referred to as the Family of Apps. With the introduction of their new automated ads platform (Advantage+), Meta has allowed companies to utilize AI to display their ads to users. Reels and click to messages (pushing the consumer to a business chat on WhatsApp) are newer sources of revenue for Meta. They also have a second platform called Reality Labs. Where they sell VR devices (Quest) and AI Glasses (Ray Ban Meta and newly introduced Ray Ban Display). They have minimal revenue from this segment and lose billions each quarter. Meta has developed multiple AI products that sit on top of these two business lines. They have their Llama Models which they have made open source. Meta AI which is integrated into their apps and AI Chips to lessen dependence on Nvidia.

Recent Financial Performance

Over the last couple of quarters we have seen Meta beat revenue expectations but fall short on EPS. For Q2 2026 they saw revenue increase 28% y/y to $60.8B. They missed EPS estimates for the first time in 5 quarters due to high expenses increasing 55%. DAU has been growing at a steady rate across the Family of Apps to reach 3.60B. The biggest indication of their AI success is price per ad which has increased 21% y/y. Compared to a 9% increase the previous year. As they have increased price per ad, ad impressions have grown at a slower rate. They continue to lose between $4-6B per quarter on their reality labs division with no indication of becoming profitable. Their largest expense this year will be CapEx. They have increased their spend guidance for 2026 to $130-145B which is almost double what they spent in 2025. Most of this will be used to purchase AI infrastructure. Due to these increased spend they only had $784M of Free Cash Flow in Q2 2026. Down from over $8B the prior year. Estimates show continued strong revenue growth but negative free cash flow until at least 2027 due to AI spend.

Growth Drivers & Strategic Bets

As mentioned before Meta has been able to increase their price per ad due to AI improvements on their platform. Another factor to note is they have decided to open source their Llama models. Allowing others to use their AI technology. They have grown reels as a form of revenue and are seeing increased usage on their apps. Another area to watch is their ability to grow messaging revenue from WhatsApp and Messenger. Meta and it's partner EssilorLuxottica own most of the smart glasses market which should continue to grow. Competition from TikTok and YouTube will take away from user engagement. Competitors such as Google and Amazon will compete for advertising dollars. And other AI companies like OpenAI, Google and Anthropic will outperform their technology.

Capital Allocation & Balance Sheet

As you can see Metas balance sheet has expanded dramatically to meet their AI goals. They have more than doubled their assets over the last year. While Meta continues to produce large amounts of operating cash flow ($32B in Q2 2026) most of it will be spent on AI. It appears Meta has stopped or decreased share repurchases in the beginning of 2026. But will continue to pay a dividend. We expect Meta under the direction of Zuckerberg and CFO Susan Li to continue to invest heavily in AI computing power for the time being.

Competitive Comparison

Meta has a higher profit margin than its peers Alphabet Amazon and Microsoft. They also trade at a cheaper valuation than Alphabet on some levels. Mainly due to it's spend being very high. Microsoft has been spending just as high % of revenue into their Ai infrastructure. But they have the ability to sell compute through their cloud division which Meta does not. Snap has not been able to turn a profit and is behind Meta on many fronts. We will not go into detail on Open AI and Anthropic as they are not public companies but these will be Megas biggest competitors in the future when it comes to AI.

Moat & Risks

Meta has access to billions of users through 3 of the largest apps in the world. This gives them data that they can use to help better their ads through AI. Meta has a few risk factors to consider. Users are reaching maturity in certain regions. There will continue to be regulation from the US and European Union regarding their size and how they operate. Their Reality lab will continue to lose money for the foreseeable future. Their increased spend is impacting their profits currently. Meta relies heavily on Nvidia to provide them with chips. Apples change to how you collect users information is hurting Meta's advertising platform.

Valuation

Meta is trading around 28x earnings which is in line with it's 5 year average. Meta also trades at a lower EV/EBITDA compared to Alphabet. Meta may look overvalued on a cash flow basis but that is due to there high spend currently. We feel Meta is fair to slightly under valued.

Bull, Base and Bear Case

Our bull case for Meta would be between $950-$995. This assumes AI helps increase ad pricing. Spend decreases in 2027. And we start to see smart glasses become a popular product. Our base case for Meta is $825. We believe advertising will continue to grow at a slower rate and spend will remain high into 2026. With Reality labs continuing to lose money. Our bear case for Meta is $600-$650. AI will not help Meta with their ad pricing. Spend continues to increase and regulation may play a bigger factor on Meta's advertising platform.

Signals From Capital Markets

Blackrock and Vanguard continue to hold large positions. Analyst's all believe Meta is a buy but range from $650-$995 in there price targets. Recent insiders selling has been low. One thing to note about Meta is Mark Zukerberg holds about 61% of the voting power. He does not own that much stock but can vote on all decisions that are made for Meta.

Conclusion

We would like to see investors hold Meta as a buy. Meta is great if you are looking to invest in tech companies that revolve around advertisement. We would not recommend investing in Meta if you need cash flow in the near term. We are very bullish on Meta advertising and less confident on how long it will take for them to generate money from there high spend on AI.