AI-Powered Ads Set to Catalyze Yet Another META Earnings Beat

Business Insider

5 days ago

I've been bullish on Meta Platforms (META) for years, and since it is now my largest holding by far, I am particularly excited about its Q2 results, scheduled for release after tomorrow's market close. After a fantastic Q1 that crushed expectations in late April, Meta's stock has climbed above $100 per share; yet, I believe the stock remains a bargain, given its AI-fueled growth and overall investments to secure dominance in AI.
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For its upcoming results, investors will be eager to see if Meta can maintain its momentum, and given the company's relentless focus on maximizing monetization potential and advertising efficiency, I feel this is going to be another blockbuster quarter. The stock also appears reasonably valued to this day despite the recent share price gains. Thus, I remain firmly Bullish on the stock.
Q1 Recap: AI and User Engagement Power Record Results
To get a sense of where Meta's coming from heading into its Q2 results, keep in mind that Q1 was nothing short of spectacular, with revenue soaring to $42.3 billion, up 16% YoY, while beating estimates by nearly $1 billion.
The company's Family Daily Active People (DAP) hit 3.43 billion, up 6%, showcasing sticky user engagement across Facebook, Instagram, and WhatsApp. AI-driven content recommendations fueled a 5% rise in ad impressions and a 10% increase in average ad prices, with Instagram Reels alone posting 20% year-over-year growth. In the meantime, Meta AI, approaching 1 billion monthly active users and over 3 billion across its app suite, has become a cornerstone of personalized content delivery, enhancing engagement and ad performance.
Profitability was equally impressive, with Meta's operating margin expanding to 41% from 38% last year, driven by cost discipline and economies of scale within the Family of Apps segment. Despite Reality Labs posting a $4.2 billion operating loss, the core ad business generated $21.8 billion in operating income, powering a 35% surge in net income to $16.6 billion and a 37% jump in EPS to $6.43, well ahead of Wall Street's $5.25 forecast.
One notable contributor here was Meta's notable investment in AI infrastructure, including models like Llama, which continues to optimize ad delivery and user retention, setting the stage for sustained growth without compromising gross margins.
What Investors Should Watch Out for in Q2
As Meta heads into its Q2 earnings, Wall Street appears to be filled with optimism, as evidenced by the share price; yet, I would argue that expectations are tempered given the rather conservative estimates. Specifically, consensus projects Q2 revenue of $44.79 billion, only a 14.6% YoY increase, all while EPS is forecasted at $5.86, reflecting 13.5% growth over Q2 of 2024.
Now, these figures do align with Meta's guidance of $42.5-$45.5 billion in revenue, supported by a 1% foreign currency tailwind. However, they are pretty conservative in my view, given Meta's ongoing momentum, as well as the fact that Meta has consistently beaten its outlook. In fact, Meta has beaten EPS and revenue estimates nine times in a row and is odds-on to make it ten out of ten this week.
Regardless, I will be looking for progress on several key areas. First, the impact of AI on ad performance, primarily through tools like Advantage+ and the subsequent effect on conversions. Second, engagement metrics, especially time spent on Instagram and Facebook, will signal whether Meta's recommendation systems are keeping users increasingly engaged. Third, I will be checking for updates on WhatsApp monetization, with its 100 million business users that could unlock significant revenue potential.
Finally, capital expenditure guidance, expected to be $64-$72 billion for 2025, will be scrutinized as Meta ramps up AI infrastructure investments.
Valuation: Still a Bargain Despite the Run-Up
While entering an earnings report following a rally can raise caution, I believe Meta's valuation still presents a compelling opportunity. At approximately 28x Wall Street's FY2025 EPS estimate of $25.73, the stock looks attractively priced for a company with a track record of 35%+ annual EPS growth—and 37% growth in Q1 alone. According to TipRanks data, META's profit margin has climbed consistently from just above 12% in Q4 2022 to over 36% today.
My own forecast places 2025 EPS in the $29–$30 range, supported by continued ad strength, AI-driven efficiencies, and expanding margins. Even based on the Street's more conservative $25.47 estimate, Meta's forward P/E remains below that of peers like Microsoft and Amazon, despite outpacing Apple and Alphabet in earnings growth.
Is META a Good Stock to Buy Now?
Wall Street remains quite optimistic on Meta, with the stock carrying a Strong Buy consensus rating based on 41 Buy and four Hold recommendations over the past three months. Notably, not a single analyst rates the stock a Sell. However, META's average stock price target of $761.55 suggests a somewhat constrained 6.12% upside from current levels.
Meta's AI-Powered Dominance Set to Continue
All things considered, Meta continues to execute at an elite level, with strong fundamentals, accelerating AI tailwinds, and a clear path to monetization across its core platforms. While expectations for Q2 are modest, I see plenty of room for upside given the company's track record of consistent outperformance.
Between robust engagement, ad efficiency gains, and compelling valuation, I view Meta as one of the best opportunities in large-cap tech today. I'll be watching closely on Wednesday, but my conviction remains Bullish heading into the big announcement tomorrow afternoon.