Meta’s “Off-the-Charts” Surge

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$Meta Platforms(META.US) released its Q2 2025 earnings report after the market closed on July 30th, Eastern Time. Contrary to pre-report concerns about tariffs, EU antitrust litigation, and aggressive talent acquisition affecting short-term profitability, Meta's actual performance was impressive. In simple terms, these concerns can be dismissed.

Specifically:

1. Strong Tailwind for Advertising: Advertising revenue grew by 21.5%, accelerating quarter-on-quarter. According to advertiser surveys, not only is the impact of tariffs minimal, but Advantage+ and Reels continue to drive intrinsic growth in advertising.

Breaking down volume and price, the expansion of ad impressions accelerated somewhat in the second quarter, implying further penetration of Reels among users (mainly on Facebook). The growth rate of ad pricing slowed slightly, possibly due to the dilution effect of Reels' low pricing, while also indicating that the external macro environment and competitive landscape have not changed much, maintaining Meta's advantage.

2. Bright Guidance, New Inventory on the Way: For Q3 guidance, although the company warned of the impact of EU antitrust lawsuits in the second half of the year (requiring the removal of "pay-to-remove-ads" product constraints and limiting Marketplace functionality), it still provided a high growth rate guidance of 17-24% (including a 1% currency tailwind) for total revenue. With future ad monetization on more platforms like WhatsApp and Threads (expected to contribute approximately $10 billion in annual revenue increment in the mid-term, accounting for 5-10% of current revenue), this growth trend is expected to continue.

3. Opex is Only Superficially "Crazy": Total operating expenses for the second quarter and the full year were not as high as the market expected. Since the second quarter, especially after the Llama 4 debacle, Zuckerberg seemed to be stimulated, aggressively acquiring talent to build new AI labs. Coupled with high growth in depreciation expenses, this has raised concerns about uncontrolled spending.

In reality, the situation in the second quarter was manageable, with the benefit of extended depreciation cycles, and only R&D expenses continued to grow significantly among the three major expenses. Under structural adjustments, the expansion of total expenses was relatively controllable. The annual guidance only slightly raised the lower limit by about $1 billion, overall in the range of $114 billion to $118 billion, with a year-on-year increase of 20-24%, almost in line with revenue, although the company indicated that the overall expense rate might increase in 2026.

Ultimately, with impressive revenue, profitability exceeded expectations. By business segment, the operating profit margin of App services increased by 3 percentage points year-on-year, reaching 53%. Reality Labs continued to incur losses, with the magnitude increasing, but fortunately, the scale was relatively small.

4. Capex Only Slightly Raised? Different Investment Logic: For capital expenditures, the second quarter continued to double year-on-year, but did not excessively "overspend." After Google's bold investment of $10 billion, the market is also watching other giants' Capex plans. In reality, Meta only slightly raised the lower limit from $64 billion to $66 billion, effectively increasing the lower limit by $2 billion.

The reason is that Meta's logic for investing in AI differs from Google's, Meta is more focused on internal business improvements, rather than like Google, where a significant portion is used to serve cloud business, which is heavily influenced by downstream external customer demand. Therefore, Meta's Capex investment ROI is easier to calculate and more controllable.

5. Cash Usage and Shareholder Returns: At the end of the second quarter, Meta had $47 billion in cash and short-term investments, down nearly $23 billion from the previous quarter, with $15 billion used for the acquisition of Scale AI, and the remaining decrease due to seasonal net increases in Capex and other investments.

This quarter's free cash flow was $8.6 billion, dividends were $1.3 billion, and $10 billion was spent on buybacks, showing a quarter-on-quarter decline. Annualized, shareholder returns for 2025 are expected to total over $50 billion, with a yield of 3% based on yesterday's closing market value of $1.75 trillion, which is not very high.

6. Performance Indicators Overview

Dolphin Research's View

Unlike Google, Meta's business logic in this round of AI is clearly more favorable. Aside from being cautious about Zuckerberg's sudden uncontrolled spending, Meta's medium to long-term logic is basically flawless.

The talent acquisition battle indirectly triggered by the Llama debacle should have scared some funds, recalling the shadow of being dominated by Zuckerberg's "metaverse dream" three years ago, leading to a valuation pullback. Despite the company's explanation that the new AI lab is a small and elite team, with compensation packages including options, it is not a large expenditure that would significantly drag down the annual billion-dollar operating expenses. Ultimately, the earnings report confirmed that market concerns were excessive, and current and this year's operating expenses are relatively controllable.

However, Dolphin Research believes that even if the talent battle causes some fluctuations in operating expenses, the long-term intrinsic valuation impact on Meta is very limited. Compared to the risk of high short-term expenses, Dolphin Research has always been more focused on revenue performance, specifically changes in the macro environment and competitive landscape.

In the Q1 earnings report, we were cautious about the impact of tariffs, but at the same time more optimistic about the growth dividend brought to Meta platforms by the TikTok ban (significant growth in IG duration). Therefore, the biggest surprise in the Q2 earnings report was still in advertising revenue growth, especially the guidance for Q3.

This indicates that the impact of tariffs is limited or compensated by demand from other industries (the short-term vacant ad inventory from Temu & Shein in April quickly attracted advertisers from other fields, essentially due to the platform's strong traffic competitiveness and advertising ROAS competitiveness), and Meta's intrinsic growth driven by AI and Reels offset this. More importantly, the competitive environment has not changed much, meaning Meta's advantageous position remains stable, providing Meta with the ability to resist macro risks downward and open up growth space upward.

In terms of valuation, we believe we can continue to look for investment opportunities around a neutral expectation of 23-25x P/E. After making certain improvements to our original performance expectations (removing excessive tariff concerns and considering the accelerated commercialization of WhatsApp and Threads next year), based on an estimated post-tax operating profit of nearly $80 billion in 2026 (revenue growth of 15%, operating profit margin slightly declining to 41%, and a 15% tax rate), the reasonable valuation is $2 trillion (still 15% space compared to yesterday's closing price). Additionally, if systemic risks (liquidity) or short-term negatives unrelated to competition occur, we can also refer to the valuation expectations of 18x/28x under pessimistic/optimistic sentiment respectively.

Below is a detailed interpretation

I. Strong Tailwind for Advertising

Meta can be said to be the first to feel the intrinsic drive of AI on its existing business, bringing out a two-year tailwind period for Meta, which followed a competitive relief logic in 2023.

In the second quarter, Meta's revenue was $47.5 billion, up 22% year-on-year, exceeding the upper limit of guidance and better than the market expectations that had already been raised due to the relief of tariff impacts and currency tailwinds. Of course, the main surprise was still the advertising business, which accounted for 98%, as VR had no new products and was in a low season, with revenue below expectations.

Q3 revenue guidance is also very impressive:

Meta's management expects Q3 2025 total revenue to be in the range of $47.5 to $50.5 billion, corresponding to a year-on-year growth of 17% to 24%, with currency pushing 1 point,significantly exceeding the market expectation of 13-15% growth.

Looking at specific business segments:

1. Advertising Business: Accelerated Growth in Impressions, Possibly Due to Further Penetration of Reels

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

1) Ad Impressions

In the second quarter, ad impressions growth accelerated to 11%, partly due to the user base still expanding, with DAP growing 6.4% year-on-year, and partly due to further penetration of Reels. Through calculation, the average impressions per user grew 4% year-on-year in the second quarter, unless Meta increased the loading rate of traditional ads, it is clearly relying on the increased user scale and stickiness of Reels. For example, Reels traffic on Facebook has already accounted for over 50%,

However, the ad loading rate on old platforms is already high, so Meta is starting to push the commercialization of WhatsApp and Threads to create new ad inventory.

In the second quarter, the growth rate of comprehensive ad pricing was 9%, slightly slowing quarter-on-quarter. However, the second quarter was affected by tariffs (Temu & Shein's post-tariff decline in placements, freeing up inventory, affecting short-term bidding) and the dilution effect of Reels' low pricing, so overall performance was actually quite good.

By region, North America's growth slowed by 3 percentage points to 11%, while Europe's growth rate quickly rose to 17% due to currency tailwinds. Growth in ad pricing generally indicates a strong economic environment and strong platform competitiveness.

However, while the macro environment in Q2 cannot be said to be poor, it is certainly weakened marginally, so the remaining possibility is that Meta's competitive advantage was further amplified in Q2. This is similar to what we see in advertiser surveys—AI tools from leading platforms are favored and widely adopted by advertisers; TikTok, although granted another ban extension, is disliked by advertisers for its uncertainty, reducing their willingness to place ads, and shifting to other platforms (with AI or high traffic growth).

2. VR: No New Product Stimulus Means Low Season

In the VR business, until a truly blockbuster product achieves universal user penetration, there is not much to discuss. The second quarter still reflects the characteristics of a dull market demand after the hot sale of Quest 3S during the shopping season. Overall revenue was $370 million, up 5% year-on-year, with growth slightly recovering compared to the first quarter, mainly benefiting from Ray-Ban Meta smart glasses, but VR headsets continued to decline.

Operating losses continue to expand, indicating that the optimization progress of RL labs is not fast enough, and attention should be paid to subsequent effects.

II. Talent Acquisition Battle, but Spending Not Out of Control

The second quarter still benefited from the extended depreciation period of servers, with gross margin improving nearly 1 percentage point year-on-year and remaining flat quarter-on-quarter. Despite the Llama 4 debacle and Zuckerberg's aggressive talent acquisition, spending was still considered controllable, with this year's guidance only slightly raising the lower limit by about $1 billion.

The number of employees decreased by nearly 1,000 quarter-on-quarter, likely due to the impact of the 5% layoff announced at the beginning of the year. Combined, it indicates that while Zuckerberg is aggressive in acquiring talent, it is also a structural adjustment under total control. The 5% employee optimization is clearly aimed at traditional advertising departments, operations management departments, and basic code developers. Zuckerberg recently said that AI is expected to replace nearly half of basic engineers.

Ultimately, with impressive revenue, profitability exceeded expectations. The operating profit margin of App services increased by 3 percentage points year-on-year to 53%, driving the overall operating profit margin to 43%. However, considering higher depreciation expenses and operating investments next year, high expense rates may drag down the space for further profit margin improvement, or even cause a decline. Therefore, Dolphin Research has also made moderate downward adjustments to the 2026 performance expectations.

In the second quarter, capital expenditures reached $17 billion, doubling year-on-year, exceeding market expectations. However, after Google announced an additional $10 billion Capex, market expectations for giant Capex have been positively raised. But Meta's increase was not significant, only raising the lower limit of the annual capital expenditure range by $2 billion, with the overall range between $66 billion and $72 billion.