Meta anticipates CapEx dollar growth to rise notably in 2026 with AI investments

Earnings Call Insights: Meta Platforms, Inc. (META) Q3 2025

MANAGEMENT VIEW

* Mark Zuckerberg reported "another strong quarter with 3.5 billion people using at least one of our apps every day." He highlighted Instagram's milestone of "3 billion monthly actives" and Threads surpassing "150 million daily actives." Zuckerberg stated, "I am very focused on establishing Meta as the leading frontier AI lab," emphasizing Meta Superintelligence Labs, next-generation AI models, and aggressive investments in compute capacity. He asserted, "We're heads down developing our next generation of models and products and I'm looking forward to sharing more on that front over the coming months."
* Zuckerberg described high engagement: "Video is a particular bright spot with video time spent on Instagram up more than 30% since last year," and noted, "Reels now has an annual run rate of over $50 billion."
* The company is also ramping up hardware: "At Connect, we announced our 2025 line of AI glasses... The new Ray-Ban Meta glasses and Oakley Meta Vanguards are both selling well."
* Susan Li reported, "Q3 total family of apps revenue was $50.8 billion, up 26% year-over-year." She added, "Q3 family of apps ad revenue was $50.1 billion, up 26%." Li further explained, "Q3 total expenses were $30.7 billion, up 32% compared to last year," with expense growth driven by "legal-related expense growth," "employee compensation growth," and "growth in infrastructure costs."
* Li also detailed, "Net income was $2.7 billion or $1.05 per share. Excluding the onetime tax charge, our net income and EPS would have been $18.6 billion and $7.25 per share, respectively."

OUTLOOK

* Li guided, "We expect fourth quarter 2025 total revenue to be in the range of $56 billion to $59 billion." She updated, "We expect full year 2025 total expenses to be in the range of $116 billion to $118 billion, updated from our prior outlook of $114 billion to $118 billion." Capital expenditures for 2025 are now expected "to be in the range of $70 billion to $72 billion, increased from our prior outlook of $66 billion to $72 billion."
* Looking ahead, Li stated, "We expect the set of investments we're making within our ads and organic engagement initiatives next year will enable us to continue to deliver strong revenue growth in 2026," but warned, "CapEx dollar growth will be notably larger in 2026 than 2025. We also anticipate total expenses will grow at a significantly faster percentage rate than 2025, with growth primarily driven by infrastructure costs."
* Management noted ongoing regulatory risks could affect European revenue "as early as this quarter."

FINANCIAL RESULTS

* Consolidated Q3 revenue was $51.2 billion, up 26%. Family of Apps ad revenue reached $50.1 billion. Total expenses increased to $30.7 billion. Operating income was $20.5 billion, with a 40% operating margin.
* Free cash flow was $10.6 billion. $3.2 billion of Class A common stock was repurchased, and $1.3 billion paid in dividends.
* Li disclosed a "onetime noncash reduction in deferred tax assets" that resulted in a tax rate of 87% for the quarter, while "excluding this charge, our tax rate would have been 14%."
* Reality Labs revenue was $470 million, up 74%, "partly due to retail partners stocking up on Quest headsets ahead of the holiday season."

Q&A

* Brian Nowak, Morgan Stanley: Asked about early signals from AB tests and Reality Labs headwind. Li responded, "Value-weighted conversion rates, we're seeing very strong year-over-year growth and conversion -- weighted conversions continue to grow faster than impressions." On Reality Labs, "Q4 Reality Labs revenue will be lower than last year... the biggest factor is we're lapping the introduction of Quest 3S in Q4 of last year."
* Douglas Anmuth, JPMorgan: Asked about CapEx growth and targets for cash. Li replied, "We're...still in the process of putting together our budget for 2026... our strategic priority is really making sure that we have the compute that we need to be well positioned to succeed at AI."
* Eric Sheridan, Goldman Sachs: Inquired about consumer Meta AI engagement. Zuckerberg stated, "More than 1 billion people use Meta AI on a monthly basis. As we improve the quality of the model... we continue to see improvements in usage."
* Mark Shmulik, Bernstein: Asked about ad performance runway and product launches. Li said, "We are working on advancing our inference models by developing new techniques in architectures that then allow us to scale up compute and complexity in an ROI-positive way."
* Justin Post, BofA Securities: Questioned about new content cycles and margins. Zuckerberg said, "It's too early to really understand what the margins are going to be for the new products that we build."
* Ross Sandler, Barclays: Queried about AI lab goals. Zuckerberg explained, "The research is going to enable new technological capabilities to exist... I would sort of expect this exponential curve in new technology capabilities."
* Ronald Josey, Citi: Asked about Advantage+ adoption. Li noted, "Advertisers who run lead campaigns using Advantage+ are seeing a 14% lower cost per lead on average than those who are not."
* Youssef Squali, Truist Securities: Asked about wearables and AI initiative financing. Zuckerberg responded, "Ray-Ban Meta and Oakley Meta product is going very well... if these continue going as well as it has been, then I think it will be a very profitable investment."

SENTIMENT ANALYSIS

* Analysts' tone was generally positive but included pointed questions about ROI on CapEx, expense growth, and monetization runway for new AI products, with some skepticism about the pace and scale of investments.
* Management was confident and optimistic in prepared remarks, with Zuckerberg frequently underscoring Meta's "huge opportunity ahead," but both he and Li were more circumspect when pressed for specifics, often noting, "it's too early" or "still in the process."
* Compared to the previous quarter, the tone remains confident but with heightened emphasis on the scale and urgency of infrastructure investments.

QUARTER-OVER-QUARTER COMPARISON

* The company raised 2025 CapEx guidance from $66–$72 billion to $70–$72 billion and expenses from $114–$118 billion to $116–$118 billion.
* Management's strategic focus has sharpened further on AI infrastructure and compute, with more pronounced language around "aggressively frontloading" investments.
* Analysts continue to probe for details on ROI and monetization, but concerns about regulatory headwinds in Europe and the U.S. are more prominent this quarter.
* Reality Labs revenue growth was stronger this quarter due to earlier stocking of Quest headsets, but Q4 headwinds are anticipated due to product launch timing.
* Management's confidence level in AI-related investments and infrastructure expansion has increased, with recurring emphasis on being "prepared for the most optimistic cases."

RISKS AND CONCERNS

* Regulatory and legal risks remain elevated, with Li referencing "increasing headwinds in the EU and the U.S. that could significantly impact our business and financial results."
* Specific mention of potential negative impact on European revenue and U.S. legal proceedings slated for 2026.
* Substantial increases in infrastructure and employee compensation costs could pressure margins if revenue growth does not keep pace.

FINAL TAKEAWAY

Meta Platforms is doubling down on AI, compute infrastructure, and next-generation engagement products, raising its CapEx and expense outlook for both 2025 and 2026. Management reported robust user and revenue growth, highlighted strong advertiser adoption of AI-driven solutions, and outlined a clear focus on scaling up to meet anticipated demand for AI capabilities. While regulatory and cost headwinds persist, Meta's leadership emphasized their conviction that aggressive investment in AI and compute will position the company to capitalize on significant opportunities in both core and emerging business lines.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/meta/earnings/transcripts]

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