Meta Earnings Preview: AI Advertising Drives Growth, $100 Billion Spending Tests Margins

[Source: Meta Official Earnings Report]

In the fourth quarter of 2025, Meta reported revenue of $59.89 billion, up 24% year-over-year, and earnings per share of $8.88, both of which exceeded estimates. Ad impressions increased by 18% year-over-year, and the price per unit rose 6%, bucking the trend. However, costs and expenses for the quarter surged 40% year-over-year, and the operating margin narrowed from 48% to 41%. Full-year revenue surpassed the $200 billion mark for the first time, with capital expenditures reaching $72.2 billion.

Notably, Reality Labs, the metaverse division, recorded an operating loss of $6.02 billion in the fourth quarter of 2025, with total losses for the year reaching approximately $19.2 billion. On January 14, 2026, Meta announced it would lay off approximately 10% of the division's workforce (affecting over 1,000 positions) and close three VR game studios, shifting resources toward its AI business. On April 1, an additional 168 employees were laid off in the Seattle area, primarily from Reality Labs' wearables and VR teams. On April 24, the company announced a new round of 8,000 layoffs to fund massive AI investments. CFO Susan Li noted that Reality Labs' losses in 2026 are expected to be on par with those of 2025.

In the first quarter of 2026, Meta's advertising revenue is projected to grow 22% year-over-year to approximately $38 billion, closing in on the $62 billion reported by Google ( GOOGL) for the same period. eMarketer further predicts that Meta's full-year net advertising revenue will reach $243.46 billion, surpassing Google's $239.54 billion for the first time to become the world's largest digital advertiser.

The primary driver of advertising revenue growth is the application of AI technology in advertising, where tools like Advantage+ have increased advertiser ROI by 32% and reduced creative costs to 10% of traditional methods. AI assistants now support small and medium-sized advertisers, and the conversion rate volatility for AI-generated batch creatives is below 5%, a performance level significantly more stable than the 15% seen in manual operations. Watch time for short-form video platform Reels has increased by over 30% year-over-year, releasing a substantial amount of ad inventory.

However, this high growth is underpinned by massive capital investment; Meta expects capital expenditures of $115 billion to $135 billion in 2026, roughly double the $72.2 billion in 2025 and significantly higher than the $110 billion expected by Wall Street.

Substantial capital investment will directly impact profit margins. In the fourth quarter of 2025, costs and expenses rose 40% year-over-year, while revenue increased by only 24%, causing the operating margin to drop from 48% to 41%. To alleviate financial pressure, the company simultaneously announced it would cut approximately 8,000 employees and eliminate 6,000 vacant positions to raise funds for AI infrastructure, with the layoffs taking effect on May 20, 2024.

Furthermore, a narrowing of losses at Reality Labs is in sight, following a fourth-quarter loss of $6.02 billion and a full-year loss of approximately $19.2 billion. Zuckerberg expects losses to flatten this year before gradually declining, while the CFO explicitly stated that VR investment will decrease significantly as spending shifts toward wearables such as smart glasses. Reality Labs' losses in 2026 are expected to remain flat compared to 2025 and begin narrowing gradually from 2027. Meta laid off over 1,000 employees at Reality Labs early this year, closed three VR studios, and suspended several VR projects. Overall, Meta is pivoting its focus from the Metaverse toward AI.

[Source: Refinitiv, TradingKey]

According to TradingKey data, as of April 27 ET, the consensus rating from 67 analysts is "Buy," with an average price target of approximately $846.1, implying a 28.36% upside from the current share price.

Evercore analyst Mark Mahaney maintained a "Buy" rating and a $900 price target, expecting a modest first-quarter beat within the guidance range, noting that advertiser spending has not seen a widespread decline and AI-driven tailwinds persist.

Morgan Stanley reiterated an "Overweight" rating and a $775 price target, naming Meta as a top pick and stating that the core digital advertising business remains in good health. Goldman Sachs raised its price target from $835 to $840, maintaining its "Buy" rating.

UBS raised its price target to $908. Citizens analyst Andrew Boone reiterated a "Buy" rating and a $900 price target, believing that Meta is in the midst of a structural AI cycle and the market underappreciates the sustainability of its revenue growth, noting that a valuation of 20.3 times 2027 GAAP EPS is not expensive.

Additionally, Rosenblatt lowered its price target from $1,144 to $1,015 while maintaining a "Buy" rating, implying approximately 66% upside.

Despite general institutional optimism, Meta still faces multiple pressures.

Meta's share price has gained only about 2% this year. Dragged down by high capital expenditure expectations, the company’s operating margin in its Q4 2025 earnings report fell from 48% to 41%; any margin performance that misses expectations could trigger a valuation correction.

On the competitive front, TikTok’s time spent grew 6.7% in the first quarter—lower than Meta’s double-digit growth, yet competition remains fierce. Google is also gaining momentum with generative AI search ads and YouTube Shorts, rapidly seizing advertising budget share.

Meanwhile, the EU’s Digital Markets Act (DMA) continues to apply pressure, and Meta’s targeted advertising business in regional markets faces compliance challenges.

Technically, Meta is enforcing a migration from its legacy Advantage+ advertising system. Some advertisers have reported stability issues with the AI tools; if these system problems persist through the second quarter, advertiser retention and spending budgets could be impacted.

Furthermore, the stalemate in U.S.-Iran negotiations persists, and any escalation in Middle East tensions could indirectly affect advertising budgets and supply chains.

The market will closely focus on four core questions during Meta's earnings call:

First, whether management can provide a clear payback period as they quantitatively evaluate the return on investment for AI infrastructure;

Second, the advertising upgrade roadmap—specifically, the progress of the full migration to Advantage+ and the sustainability of conversion rate gains;

Third, whether Reality Labs can establish a more specific timeline for loss reduction or strategic downsizing;

Fourth, whether the full-year capital expenditure guidance will remain unchanged or continue to be revised upward.

These changes will directly influence the market's outlook on 2026 operating margins and free cash flow.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.