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Meta's Aggressive CapEx Increase: What Is Zuckerberg Seeing Ahead of Earnings?

Stock SpotlightTuesday, Jan 28, 2025 10:54 pm ET

1min read

Meta is set to release its latest earnings report, with investors closely monitoring its advertising business, Reality Labs, and capital expenditure trends. Notably, Mark Zuckerberg recently announced plans to allocate $60–65 billion to AI spending this year, significantly exceeding the market's expectation of $51 billion.

Advertising Business: The Core Revenue Driver

The Reality Labs has yet to reach meaningful monetization, leaving the bulk of Meta's revenue reliant on ad income from its social media platforms. Bloomberg predicts Meta's Q4 ad revenue will grow by 18%.

AI has been instrumental in boosting Meta's ad performance. Zuckerberg revealed that over one million advertisers are now using Meta's generative AI advertising tools. According to Meta's Q3 report, Facebook usage time increased by 8%, while Instagram usage grew by 6%, thanks to AI's precise content recommendations.

Meta AI boasts over 500 million monthly active users, positioning it as one of the most widely used AI assistants. This AI-driven approach enhances advertisers' ability to target specific audiences, while users enjoy more tailored and engaging content. The result? Higher ad conversion rates, longer user engagement, and increased revenue streams from both advertisers and users.

TikTok Ban: A Potential Windfall

Another critical factor for investors is TikTok's potential ban. Since its explosive growth in 2022, TikTok has captured significant teen attention, posing a major challenge to Meta. Should TikTok face restrictions, Meta and Google stand to be the biggest beneficiaries.

Reality Labs: Reducing Losses While Expanding Market Share

Investors are also watching Meta's Reality Labs division, particularly its timeline for reducing losses. Despite its financial challenges, Reality Labs has made notable strides. The affordable Quest VR devices and Ray-Ban smart glasses have secured a significant portion of the VR market, overshadowing Apple's Vision Pro.

Goldman Sachs analyst Jack McFerran cited Sensor Tower data showing a 200% year-over-year surge in downloads of the Meta View app in Q4 2024, an app primarily used for smart glasses. Insiders suggest that Reality Labs plans to release a new high-end smart glass with an integrated display in 2025, further advancing Meta's position in the wearable device market.

Capital Expenditure: Balancing Growth and Profitability

Meta's recent sharp increase in capital expenditure is another area of investor scrutiny. While Zuckerberg's ambitious spending plan could strain profitability, it reflects the company's strategic pivot toward AI and innovation.

The focus now lies on two critical questions:

How will Meta manage its capital spending to ensure a robust return on investment?

How will the company balance the rising costs of its AI initiatives with the need to sustain and grow profitability?

As Meta continues to bet heavily on AI, advertising, and hardware innovation, this earnings report will reveal whether these investments are aligned with market expectations and capable of justifying the company's bold strategy.

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