TikTok 劫，Meta 爽，老扎 AI 野心再膨胀！

Hello everyone, I am Dolphin Research!

$Meta Platforms(META.US) released its Q1 2025 financial report after the market closed on April 30th, Eastern Time. It can be said that this Meta financial report is very important and has captured people's attention.

Recently, the weakening of domestic consumption and the impact of tariffs have put pressure on the growth prospects of advertising companies. The slightly different statements from the management of Google and Snapchat regarding the macro outlook (Google's qualitative description is relatively positive, while Snapchat has cautiously withdrawn guidance) have made the current market expectations even more ambiguous. Therefore, as the world's second-largest advertising platform, Meta's management guidance for growth in Q2 will be particularly crucial for the expectations of the entire advertising industry and the subsequent stock price trends of relevant targets.

In addition, under the severe changes in the environment, whether the company will adjust its Capex and Opex spending targets will also attract the attention of Meta shareholders regarding profit margins and the investments of shareholders in the upstream and downstream companies of the AI industry chain.

Without further ado, Dolphin Research will get straight to the point:

1. Guidance is decent, tariff impact may be controllable: The revenue guidance range for Q2 2025 is between $42.5 billion and $45.5 billion, with a growth rate of 11% to 16%, which includes a 1-point impact from exchange rate changes.

Market expectations are quite chaotic, with a wide range of estimates, from conservative single-digit growth to optimistic low double-digit growth. However, the actual guidance, overall, is basically in line with expectations. The outlook from Google, Snap, and Meta collectively confirms the industry's pressure period. The leading effect advertising giants can absorb some brand advertising budgets from small and medium platforms simultaneously, thus having higher resilience to pressure.

2. From the perspective of volume and price changes, Q1 may benefit from the TikTok ban: For the two drivers of advertising revenue—display volume and unit price growth—Dolphin Research mainly looks at the trend of marginal changes in growth rates. Generally speaking, the display volume is controlled by leading platforms, which can be relatively proactive in adjusting. However, the growth rate of advertising unit prices is closely related to the macro environment and competition.

The overall growth rate of advertising unit prices in Q1 was 10%, which naturally slowed down quarter-on-quarter. However, in North America, the growth rate of unit prices actually accelerated (Q1 was 14%, higher than 12% in Q4 of last year). From the recent economic data disclosed, the macro environment does not show an upward trend. Therefore, it is likely that Meta's competitive advantage was amplified in Q1.

Combining data from Sensor Tower, around the time of the TikTok ban in January, Meta's platforms, including FB, IG, and the new platform Threads, all experienced traffic growth. Especially Facebook, which had long been aging, saw a net increase of 750,000 daily active users, reflecting the demand for users to seek alternativesAdvertisers will naturally make similar migration moves, shifting their advertising budgets from TT to the Meta series, which indicates that Meta's unexpected revenue includes benefits from TikTok. Conversely, as TikTok's ban continues to be postponed, some advertisers' short-term budgets may also revert somewhat.

3. Emphasizing AI, increasing Capex: Regarding Capex, the market is highly focused on the guidance from several major model/cloud platform giants this time. It not only reflects the growth expectations of the upstream industry chain this year but also certifies the actual demand for AI.

Meta has increased its full-year capital expenditure range to USD 64-72 billion, a significant increase compared to the previously proposed guidance of USD 60-65 billion, maintaining/increasing Capex is the expectation of most market institutions.

The market's reaction to the giants' high Capex this time is mostly positive: Mainly because in the current complex environment, relying entirely on self-growth carries significant risks. If they insist on increasing investment in AI, it precisely indicates that the giants recognize the strong terminal demand.

Since April, Meta has successively released LIama 4 and the independent AI app embedded with Llama 4—Meta AI. Although Llama 4's hasty release has shown some setbacks, as if Zuckerberg rushed it to market with a forced deadline just to counter DeepSeek, MetaAI still possesses certain product uniqueness by leveraging years of accumulated social data to create a more intelligent AI Agent for users, thus achieving competitive differentiation.

4. Lowering operating expenses, is Efficiency Year 2.0 starting?: In Q1, due to extended server depreciation, both the gross margin in Q1 increased year-on-year and quarter-on-quarter. Despite increased R&D investment, the overall total operating expenses, after a reduction in legal fees, only grew by 9.4% year-on-year, which is less than the revenue growth, indicating short-term profitability improvement.

The management has also lowered the full-year operating expenses, reducing the range by USD 1 billion to between USD 113 billion and USD 118 billion. Although the number of employees in Q1 still increased by nearly 2,800, the 5% layoffs announced in January may still be ongoing, which is not enough to offset the new hires in R&D, but Zuckerberg has repeatedly mentioned the future replacement trend of AI for internal R&D engineers.

Therefore, to cope with the complex environment and alleviate this year's profit growth pressure (expected to be single-digit growth or flat growth), Dolphin Research speculates that the company may once again initiate an efficiency year strategy, optimizing teams outside of core AI R&D.

5. VR Christmas sales followed by a decline: There isn't much to discuss regarding VR-related Reality Labs, mainly reflecting the characteristics of market demand in the off-season after the hot sales of Quest 3S during the shopping season. Q1 revenue was USD 412 million, a year-on-year decline of 6%, and the performance of Quest 3S during the shopping season did not carry over into Q1In the first quarter, the operating loss of the RL business increased, and there are recent rumors that Meta intends to continue optimizing the RL lab. Dolphin Research believes that achieving sustained and stable profitability in the short to medium term is basically difficult to see. Therefore, as the company continues to optimize related teams and reduce investments, it may accelerate the turnaround.

6. Cash Usage and Shareholder Returns: At the end of the first quarter, Meta had a total of $70.2 billion in cash and short-term investments, with a net cash of $41.4 billion after deducting long-term borrowings, a decrease of $7.5 billion from the previous quarter. This quarter's free cash flow was $10.3 billion, with dividends of $1.33 billion and $12.8 billion used for repurchases. Annualized, the expected shareholder return for 2025 (repurchase of $53 billion + dividends of $5.5 billion) totals a yield close to 4%, which is higher than the previous quarter, mainly because the market value has dropped.

7. Performance Indicators Overview

Dolphin Research's Viewpoint

Before Google's earnings report, the market had little idea of how much tariffs would impact advertising, but it can be confirmed that tariffs have a greater impact on the industry than on leading companies with traffic and effective advertising. Therefore, the growth expectations for Google and Meta, the two leaders, have only been tentatively adjusted down by 2%-3%, mainly to bring down valuations first. When Trump raised tariffs to their peak, Meta's valuation dropped to 17x, and Google's dropped to 15x, both of which were relatively extreme low points in history.

In Q1, both companies actually performed well, but Dolphin Research believes that the driving forces behind the strong growth of Google and Meta are different. For Google, the significant growth in finance, pharmaceuticals, and tourism in the first quarter are all advantageous areas for search advertising; whereas for Meta, it may partially benefit from the TikTok ban.

Considering that the tariff war is still ongoing, although there has been some marginal easing recently, Trump's daily fluctuations and determination to resolve government debt make it possible that there will be further impacts when market sentiment is relatively positive. Due to uncertainties about the future, regardless of how tariff negotiations go, advertisers' willingness to invest this year will likely see some adjustments.

Therefore, we believe that Meta's revenue guidance for Q2 may only alleviate immediate concerns. Entering May, with the adjustment of the small package tax exemption policy, Meta may face more impacts from the retreat of Chinese advertisers. In 2024, Chinese advertisers, accounting for 10% of revenue, contribute significantly, especially in the area of physical e-commerce trade, which is also the sector facing high tariffs directly.

Taking Temu as an example, in early April, Temu quickly suspended almost all marketing activities in the U.S. According to market estimates, assuming continued cessation of advertising, if local businesses can be found in time to fill the gap, the impact would be about 2% of total revenue in 2025 (which is the portion currently expected to be adjusted down); otherwise, it would have a greater impact.

Therefore, finding new growth engines while simultaneously improving operational efficiency will help alleviate the pressure on profit release this year. This is also why the market's feedback on the giants maintaining/increasing Capex is leaning positivelyThe giants actively maintain or increase their Capex scale, indicating the company's confidence in the demand for end-user AI applications, which the market interprets positively.

However, it is inevitable that this year's profits are still under pressure. Currently, Meta has a market value of 1.39 trillion, trading at a valuation level of 22x P/E for 2025 (assuming a revenue growth of 13%, total expenses of 113 billion, and a profit growth of 5%) , which is roughly similar to previous years' averages, with pessimistic/optimistic valuations at 16x/28x respectively. Considering that the impact of advertising often lags the economy by a quarter, the growth expectations for the second half of the year are likely to face some fluctuations, affecting the continuous rebound of valuations. Recently, market sentiment valuations have been continuously improving with the easing of tariffs, so if one hopes to achieve a higher return with a safety cushion, it might be wise to wait for positions close to pessimistic sentiment.

From a medium to long-term perspective, Dolphin Research is optimistic about Meta, which has a high social barrier. In responding to the reshuffling of traffic entry brought by AI, it can not only rely on its moat to resist risks but also combine leading AI model development to lead user experience in product applications and services.

The following is a detailed interpretation

1. Advertising: Benefiting from Competitive Advantages, Guidance Slightly Positive

In the first quarter, Meta's revenue was 42.3 billion, a year-on-year increase of 16%, exceeding the upper limit of guidance and better than the previously adjusted market expectations. The main contributor to the outperformance was the advertising business, which accounts for 98%, while the VR off-season was even weaker, and shopping enthusiasm did not extend into the first quarter, resulting in revenue falling short of expectations.

The Q1 performance did not reflect the impact of the unexpectedly positive tariff war, but the company's guidance for Q2 revenue is actually not bad:

Meta's management expects total revenue for Q2 2025 to be in the range of 42.5 to 45.5 billion, corresponding to a year-on-year growth of 11% to 16%, with a 1-point boost from exchange rates. Although the market BBG expectations fall within the guidance range, institutions are often more cautious, so Meta's guidance is actually slightly better than expected.

Looking at specific business segments:

1. Advertising Business: Accelerating Price Increases Show Competitive Advantage

For the advertising business, Dolphin Research consistently tends to break down the current volume and price growth trends to better understand the current macro environment, competition, and other issues.

(1) In the first quarter, the growth rate of advertising impressions continued to slow to 5%, but the user base is still expanding (the total daily active users in the ecosystem grew by 6% year-on-year), resulting in an average impression per user declining by 0.8% year-on-year. While there are factors related to the company's active adjustments, it cannot be ruled out that the advertising loading rate on the existing platform is too high, which has indirectly affected user experience. For example, many users report seeing 7-8 ads every time they log in once a day on Reels

(2) Since Q1 2024, the monthly active user data for Facebook's main site and ecosystem will no longer be disclosed. Therefore, Dolphin Research mainly refers to the user duration data tracked by third-party platforms (Sensor Tower) to observe trends:

The growth rate of comprehensive advertising unit prices in the first quarter is 10%, which is a natural slowdown compared to the previous quarter. However, in North America, the growth rate of unit prices has actually accelerated (14% in Q1, up from 12% in Q4 of last year). From the recent economic data disclosed, the macro environment does not show an upward trend. Therefore, it is likely that Meta's competitive advantage has been amplified again in Q1.

Combining Sensor Tower data, around the time of the TikTok ban in January, Meta's platforms FB, IG, and the new platform Threads all experienced traffic growth. Especially for the long-established Facebook, daily active users increased by 750,000, reflecting the demand for users seeking alternatives.

The following chart shows that the growth rate of user duration for Meta's series of apps has rebounded from the bottom.

Naturally, advertisers will also make similar moves, shifting advertising budgets from TikTok to the Meta series, indicating that Meta's unexpected revenue benefits from TikTok. Conversely, as the TikTok ban continues to be postponed, some advertisers' short-term budgets may also revert somewhat.

2. VR: Highs and Lows, Off-Season Even More Dull

There isn't much to discuss about the VR business, which mainly reflects the characteristics of market demand during the off-season after the hot sales of Quest 3S during the shopping season. Revenue in the first quarter was 412 million, a year-on-year decline of 6%, and the performance of Quest 3S during the shopping season did not carry over into the first quarterIn the first quarter, the operating loss of the RL business increased, and there are recent rumors that Meta intends to continue optimizing the RL lab. Given the current trend, achieving sustained and stable profitability in the short to medium term is indeed a daunting task. Before the VR content ecosystem becomes rich, only continuous optimization of relevant teams and reducing investments may accelerate the turnaround.

2. Under pressure from uncertain growth, will it initiate Efficiency Year 2.0?

In Q1, due to extended server depreciation, the gross margin in Q1 increased both year-on-year and quarter-on-quarter. Although R&D investment increased, the overall total operating expenses only grew by 9.4% year-on-year after a legal expense was removed, which is less than the revenue growth, indicating short-term profitability improvement.

The management has also lowered the annual operating expense forecast, reducing the range by 1 billion, now between 113 billion and 118 billion. Although the number of employees in Q1 increased by nearly 2,800, the 5% layoffs announced in January may still be in progress, which is not enough to offset the new hires in R&D. However, Mark Zuckerberg has repeatedly mentioned the trend of AI potentially replacing internal R&D engineers in the future.

Therefore, to cope with the complex environment and alleviate this year's profit growth pressure (expected to be single-digit growth or flat growth), Dolphin Research speculates that the company may once again initiate the Efficiency Year strategy, optimizing teams outside of core AI R&D.

In the first quarter, capital expenditures reached 13.7 billion, and Meta has increased the annual capital expenditure range to 64-72 billion USD, a significant increase compared to the previously proposed guidance of 60-65 billion.

The market's reaction to the giants' high Capex this time has been largely positive: mainly because in the current complex environment, relying entirely on self-growth carries significant risks. If they insist on increasing investment in AI, it precisely indicates that the giants recognize the strong demand at the end-user level

Similar to the previous quarter, in the short term, the operating profit margin for Q1 fell to 41.5%, but it is still higher than the level of Q1 last year. At the beginning of this year, a 5% layoff was announced, along with an extension of the server depreciation period.

The 5% employee optimization clearly targets the traditional advertising department, operational management department, and basic code developers. Zuckerberg recently mentioned that AI is expected to replace nearly half of the basic engineers. However, as they are also recruiting AI-related technology developers at the same time, the overall employee cost may not fully reflect the impact of the layoffs, and it may even lead to a significant increase in employee costs due to the high salaries of AI technology talents.

The extension of the depreciation period was also an expectation mentioned by Dolphin Research in the previous quarter's commentary. Compared to peers in the Mag 7 like Microsoft and Google, Meta's server depreciation period has not undergone a new round of extension since 2022. The company announced last quarter that starting this year, the average depreciation period for Meta's overall servers will be extended from 5 years to 5.5 years (the depreciation period is 6 years). This adjustment in the depreciation period is expected to save $2.9 billion in Opex expenses this year.

Of course, the above incremental expenses are mainly reflected in R&D spending, which has a year-on-year growth rate of 21.8%. Other expenses need to continue to be strictly controlled: management expenses in the first quarter fell by 34% year-on-year, mainly due to a high base from a legal expense provision last year, while the growth rate of sales expenses slightly rebounded to 7.5%.

Ultimately, the operating profit margin for Meta in Q1 was 41.5%. Looking at the two main business segments of advertising and VR, the profit margin increase mainly relied on advertising. As expected by the company's management, the losses in VR have still expanded year-on-year, and significant loss reduction will require more blockbuster products.

However, in the short term, VR lacks sufficient content ecology and catalysts, and hardware can only rely on cost-effectiveness. Perhaps a different approach, such as AI glasses or a combination of XR + AI in new hardware categories, may become a new growth driver.