Meta Earnings: Raising Fair Value on Generative AI, Growth Runway

• Fair Value Estimate: $770
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Meta’s Earnings

Meta META reported strong fourth-quarter financial results, with the firm’s sales growing 21% year over year to $46.8 billion and operating margins expanding 700 basis points year over year to 48%.

Why it matters: Meta’s advertising behemoth surpassed our expectations on both the top and bottom line. We were impressed by Meta’s ad impression and price-per-ad growth, with both metrics expanding in the fourth quarter.

• We view Meta as carefully leveraging its investments in artificial intelligence to improve both its content recommendation and ad-monetization models, with the firm’s strong ad sales supporting the argument that these investments are already bearing fruit.
• As a testament to the enduring appeal of its platform, Meta’s global user count ticked up yet another 5% year over year to 3.35 billion. Alongside adding users, Meta’s monetization improved as well, with the firm’s average revenue per user growing an impressive 16% year over year.

The bottom line: We raise our fair value estimate for wide-moat Meta to $770 from $590, with shares now screening as marginally undervalued. The bulk of our fair value increase stems from a revised growth outlook for the firm and a more optimistic view of its generative AI investments.

• We are already seeing Meta’s generative AI tools garner adoption on the advertising side, with more than 4 million advertisers using the firm’s AI tools to create ad campaigns, up from 1 million six months ago.
• On the ad-targeting side, Meta disclosed increased ad quality by leveraging an AI-powered ad ranking system that was able to better personalize ads shown to users.

Key stats: While Meta’s record operating margin of 48% for the fourth quarter is impressive on its own, the firm’s operating profitability for its core Family of Apps segment was even better, with FoA operating margins coming in at 60%, up 600 basis points year over year.

Meta Platforms Stock vs. Morningstar Fair Value Estimate

Source: Morningstar Direct. Latest price as of 4:00 AM ET.

How Meta Can Monetize AI

As we think about Meta’s AI investments, both generative and classic, we view opportunities for the firm to monetize them within its core social media and digital advertising spaces.

As mentioned above, we saw an impressive uptick in advertisers leveraging Meta’s generative AI tools within their ad campaigns. We think about Meta’s generative AI tools will materially drive down ad creation costs and boost advertisers’ return on ad spending. For example, instead of hiring a video crew to shoot a particular ad, an advertiser could leverage Llama-powered GenAI tools to create or edit the video, while having more creative control to customize/personalize the ad for specific target audiences. As a testament to the efficacy of such tools, even as they are still in their nascent stages of development, Meta highlighted a 7% increase in conversions from ads that used GenAI tools last quarter. We see a tangible path to increased ad pricing as Meta delivers more value to its advertisers.

Switching to creators, Meta can help them create/edit their content using GenAI tools as well. These tools include being able to edit videos by giving Meta’s Llama-powered GenAI tools text prompts or changing backgrounds on pictures. As more creators use these tools, we expect user engagement to increase, enabling Meta to monetize increased viewership via ads. To this end, Meta is launching a standalone app called Edits that will provide creators with a suite of tools to edit their content.

The at-scale usage of the tools above is only possible if Meta is able to lower the costs of training and running its large language model, Llama. To that end, management openly acknowledged DeepSeek’s impressive cost/performance results that caused mayhem in the financial markets on Monday and noted that Meta’s AI engineers and developers are already working on ensuring that Meta can emulate those improvements in its own large language models going forward.

An important point for investors to note is that Meta has already been instrumental in driving down LLM prices over the past couple of years, with Llama being one of the cheapest high-performance models on the market currently.

While we initially thought that Meta’s investments in generative AI were speculative and without a clear monetization path, we have come to realize that for a company operating at Meta’s scale, being tethered to a third-party model would also incur the firm significant costs over the long run. Instead of being reliant on a third-party, such as OpenAI or Google, Meta is investing eye-watering sums of money to develop its own models, creating a gulf between its advertising products and those of its social media and digital advertising competitors (excluding Alphabet).

While AI stands to be a tangible driver of the firm’s sales, we also see a path for the firm to trim its operating expenses by leveraging AI. While Meta announced a 5% cut to its headcount in the last month, advanced AI agents that could make Meta’s engineers more productive also offer it an opportunity to scale down its research spending as a percent of sales over time. For context, Meta spent $52 billion, or 28% of sales, on research and development in fiscal 2024. We believe that as AI improves the productivity of Meta’s engineers over time, we could see the firm’s research spending relative to sales decline, improving the firm’s operating margins.

Meta Moves Beyond AI

Beyond AI, we see the firm’s ongoing efforts to introduce ads to Threads, a platform that has more than 320 million active users, as another monetization angle for the firm which will help increase Meta’s ad supply. While we don’t expect Threads monetization to be a meaningful contributor to 2025 sales, we have seen Meta scale new products (Reels and Stories being two key examples) over time and monetize them via ads. We expect Threads to have a similar long-term monetization trajectory.

We were impressed to see Meta’s Advantage+ shopping campaigns continuing to draw advertisers. Advantage+ is a set of advertising products that are geared toward e-commerce businesses. At their core, these products allow advertisers to automate their ad campaigns by providing Meta high-level guidelines of what users they’d like to target and allowing Meta’s algorithms to take the reins in terms of showing ads to audiences that Meta believes are more likely to convert. As of the fourth quarter, Advantage+ shopping campaigns have an annual revenue run-rate of more than $20 billion, growing 70% year over year. Going forward, Meta is planning to have Advantage+ as the default option for advertisers on its platform, as opposed to advertisers having to opt in right now. We believe this new approach stands to materially expand the Advantage+ revenue contribution to Meta’s overall sales while also entrenching the firm further in its advertisers’ ad budgets.

Finally, investors may be concerned about the massive amounts of capital investments required for Meta’s AI infrastructure. The firm forecasts 2025 capital expenditures will be between $60 billion to $65 billion. However, we believe capital intensity will begin to normalize in 2026 onward. As we think about Meta’s long-term capital outlay, we believe the firm’s custom AI chips will likely reduce its long-term reliance on third-party GPUs, with management outlining a future in which training and inference demand can be served via its own custom AI chips. Meta’s long-term shift toward custom AI chips is very much in-line with what we have seen other Big Tech firms such as Alphabet, Microsoft, and Amazon do and expect the investments in custom AI chips as strategically sound.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.