Yahoo Finance

Meta reporting a beat on the top and bottom lines for the third quarter. Despite having a solid quarter though, the stock has been falling. And it might be because investors are getting tired of all the spending. For more, we're bringing in Brent Thills, senior analyst at Jeffries, and Brent, like we said, capex seems to be the catalyst for why shares are moving to the downside here. But these hyperscalers, they're not going to stop spending on AI, right? So, as an investor, how do you assess how much is too much? Is it spending relative to revenues, spending relative to free cash flow? What are you looking at there?

Yeah, I think just tech is down today, uh, not necessarily on the results, but it's on, uh, the clearing of the deck ahead of next week, uh, number of big macro things that are going on with the election and, uh, the Fed meeting. Uh, so what we're seeing on our desk is not necessarily fear of Microsoft or meta massive miss. It's more a broader issue that's going on. So, uh, just to set the stage. Uh, but you're right on on on capex, that is the central focus. But I think when you start to see the type of returns we're seeing in all the hyperscalers, if you look at the capex, uh, invested to their backlog or bookings, they're equal if not bigger on the booking number. So, that means more business is coming in than they're spending. Uh, and you start to look at, it's some of the AI numbers now, uh, you can start to measure like real revenue, right? Microsoft said 10 billion dollars of revenue, fastest business to to 10 billion in the company's history. Uh, you know, we're early in in the innings of this. So, I think investors got to step back. It is a number one question, you're asking the right question, but I do think that there are effectively proxies and in past history, statements of elements that have shown that that when Microsoft spent on Azure, was that a good return? When they spent on the server business, was that a good return? And and even when Zuckerberg, you know, five, six years ago was in Congress and, uh, they came out a couple years after and said, hey, we're going to spend, that was the right thing to do and spend and the stock is higher. So, I I think we've used historic context, we used kind of current frameworks we're we're seeing, uh, already all these hyperscalar backlogs, the growth rates and the cumulative revenue exceed that of the AI capex investments. Now, not all these investments are broken on AI, but, um, we we've looked at it a lot of different ways, and so, and also like you have Nvidia and Microsoft at 30 times earnings. They're not 30 times revenue like Palantir. That's unsustainable. Okay. These are multiples that are aren't crazy. So, uh, again, for meta, you you can get a $30 earnings power, put a 25 multiple on it, I have a way higher stock price from here. So, I go ahead, professor. I think we have a good answer of of uh, of what's happening.

And Brent, so for for meta specifically, how is AI already impacting the business? Walk us through what's already showing up.

Well, it's showing up, uh, for you as an end user. So, there are three billion people that come to the platform every day, and AI is helping us as consumers find the appropriate content, understand what's relevant, uh, perhaps we're interested in skiing or golf, or we're interested in baseball, and understanding, you know, how that can gear the right content towards us. And then also tying, you know, big thing for for me is commerce. Like I I buy half my wardrobe off of Instagram. And so, you know, if you're a if you're Grayson, which is a a great, you know, uh, clothing brand targeted towards golfers, like Grayson, like knows who I am. Like they they on on, you know, Instagram are targeting me all the time. And so, I'm constantly buying new things probably I don't need. And it's because they're so targeted and they're they're approach with their ads. And so, I just go back to like, for consumers, you're going to have better content, you're going to have better commerce experiences, you're going to have better better overall experiences. For the advertisers, the small businesses that are on the platform, it makes it easier for them to create a campaign. So, if you're an interior designer and you own a small store, like my wife does in San Francisco, she can create a campaign for a sidewalk sale. We're having a sale on on couches, blankets, pillows, and oh, by the way, like instead of hiring somebody to do a photo shoot and bring a bunch of, uh, new new photos and videos and music and everything, you you hit the button, and you upload all the pictures from last year's sidewalk sale, and it'll it'll basically create the campaign for you at a fraction of that human being you'd have to hire to shoot the shoot, to drive the advertising campaign. So, I mean, there's already examples of this already working, and, uh, they've said this in terms of the up, uh, meta AI having an uplift in terms of time spent, uh, meta AI having an uplift in terms of transactions and ROI for advertisers. I can go on for hours about the experiences that people are having. But again, that's why you're seeing 20% revenue growth, that's why you see a 40% margin. And overall, again, you know, I I think I think the spending is working, and I understand the fear, but, you know, again, it's uh, it's a fear across everyone, not just for meta.