META: Q1 Earnings Look Great but the Economic Challenge is Yet to Begin

Tradingkey - Meta stock went up more than 4% after a strong first quarter delivering beats on both revenue and earnings:

· Revenue: $42.31 billion vs. $41.40 billion expected (+16.3% year-over-year)

· Earnings per share: $6.43 vs. $5.28 expected (+36.4% year-over-year)

Source: SEC Filings, TradingView

At first glance, everything in the financials seems quite good:

- Daily active users rose to 3.43 billion versus what most analysts estimated at 3.39 billion and 2.4% more than 2024Q4, as it is always good to see growth in users even with this level of penetration

- 16% growth is a solid number, so far demonstrating resilience in the context of the recent economic slowdown. The growth rate is also significantly bigger than the 8.5% growth of ad revenue Alphabet achieved in its most recent quarter. Also we believe that economic slowdown, will

- The operating margin inched further up, reaching 33.9%. We have to recognize the great margin expansion of nearly 9 percent points in the last two years

Source: SEC Filings, TradingKey

- The management increased its 2025 capital expenditure estimate to the range of $64 billion and $72 billion, up from its prior outlook of $60 billion to $65 billion. We believe that was a major relief for investors, who worried the tariffs, and the economic slowdown will affect the AI spending. The increase in the planned spending mostly stems from the fact that Meta has to cover some of the price increases in data center equipment. With this statement the company demonstrated their determination to carry on with the investment in data centers despite the obstacles.  

- The Meta AI digital assistant now has nearly 1 billion monthly users. In January, the company said the AI service had 700 million monthly users. WhatsApp is the primary way people access Meta AI, but the company released a standalone Meta AI app.

- Threads now has 350 million monthly users, Zuckerberg said. That’s up from 320 million in January. Meta has already started monetizing

However, there are a few points that may cause a concern:

- Economic slowdown: We already see an obvious slowdown in revenue in almost all geographies apart from US and Canada. The slowdown is quite obvious in APAC, dropping below the 10% mark. This can be explained with the reduced ad spending from Asia e-commerce exporters, mainly from China. Further, we believe the current UCAN growth numbers still have not reflected the slowdown and we expect this to happen in the coming quarters.  

Source: SEC Filings, TradingKey

- Monetization too soon? On the earnings call the management shared about their monetization plans for their AI platform, which will include advertisements and paid premium version. Zuckerberg specified that they would wait for at least one more year before starting to be monetizing. However, starting to monetize too soon may actually compromise the quality of the search and the overall user experience which may benefit other competitors such as OpenAI’s ChatGPT (who so far reject the possibility of incorporating ads into their searches). At this early stage of AI development, a better strategy is to amass enough critical user mass so as to create a stronger economic moth against competitors.

Valuation

Currently Meta is traded at just 22 times the last 12 months’ earnings, which is relatively low for a company with this dominant business position and growth potential in the sphere of AI.