Meta Earnings Preview: Watching CapEx commentary following DeepSeek disruption

Meta Platforms is set to release its Q4 2024 earnings on January 29, 2025, after market close. With heavy investments in artificial intelligence (AI), continued dominance in advertising, and challenges posed by new competitors like DeepSeek, this report is expected to be a critical moment for investors.

Meta’s stock has surged 45% over the past year, reflecting confidence in its AI-driven growth and advertising prowess. Despite this, its valuation is being closely watched, trading at a premium, meaning high expectations are already priced in. Any surprises—positive or negative—could prompt significant market moves.

Analysts expect Meta to report Q4 revenue of $46.9 billion, representing year-over-year growth of 17.2%. The company’s guidance indicates revenue between $45 billion and $48 billion, making these expectations reasonable. Earnings per share (EPS) is projected at $6.75, a 27% increase from Q4 2023. Key areas of focus will include advertising revenue, daily active users (DAUs), monthly active users (MAUs), and Meta’s aggressive AI-driven capital expenditures.

Meta has consistently exceeded EPS estimates over the last four quarters, with notable beats. In Q3 2024, the company reported EPS of $6.03 against a consensus of $5.22, a significant $0.81 surprise. Other quarters also demonstrated strong outperformance, with Q2 beating by $0.44, Q1 by $0.39, and Q4 2023 by $0.51. While revenue growth has remained solid, there is a clear deceleration trend. In Q1 2024, year-over-year revenue growth was 27.3%, slowing to 22.1% in Q2, 18.9% in Q3, and an expected 17.2% in Q4. This suggests that while Meta continues to expand, growth rates are moderating.

One of the most significant developments ahead of this report is Meta’s aggressive capital expenditure (capex) plan. Last week, CEO Mark Zuckerberg announced that the company expects to spend between $60 billion and $65 billion in 2025, well above the market’s previous estimate of $51.3 billion. Meta is expanding its AI capabilities, planning to build a massive 2-gigawatt data center and end the year with over 1.3 million GPUs. This signals a long-term commitment to AI dominance but raises concerns about return on investment, especially in light of the recent DeepSeek news.

DeepSeek’s rapid emergence has disrupted global AI markets, passing OpenAI’s ChatGPT as the most downloaded free app on Apple’s App Store. The Chinese AI firm reportedly developed its R1 model for under $6 million using less advanced Nvidia GPUs, raising questions about the necessity of high-cost AI infrastructure investments. This news sent shockwaves through the market, triggering a sell-off in AI-driven stocks, including Nvidia, and fueling speculation about Meta’s AI spending strategy.

The biggest question surrounding Meta’s earnings call will be Zuckerberg’s response to DeepSeek. Investors will look for any indication of how Meta views this new competition and whether it will adjust its AI strategy in response. If Zuckerberg maintains confidence in Meta’s high-capex approach, it could reassure investors about the company’s long-term AI leadership. However, any suggestion of uncertainty or shifting strategy could introduce volatility.

In addition to AI investments, advertising remains Meta’s core revenue driver, contributing 98% of total revenue. AI-powered advertising has been a major tailwind, with tools like Advantage+ and generative AI improving ad targeting and conversion rates. Meta has reported a 7% increase in ad impressions year-over-year and an 11% rise in average ad pricing. Data from major ad platforms suggests strong demand in Q4, with advertisers favoring Meta’s platforms due to its AI-driven campaign optimization. However, foreign exchange (FX) headwinds could slightly offset revenue growth.

User engagement metrics will also be a key focus. Daily active users (DAUs) are expected to reach 3.29 billion, a 5% year-over-year increase, with monthly active users (MAUs) following a similar trajectory. Meta’s AI-driven content recommendations have improved engagement, particularly for video formats, creating more monetization opportunities.

Instagram’s monetization continues to expand, with e-commerce integrations like Facebook Shops and Instagram Shopping gaining traction. Social commerce remains a key growth avenue, allowing brands to convert engagement directly into sales. This is particularly important as competition from TikTok and other platforms intensifies.

Reality Labs, Meta’s metaverse division, is expected to report another significant loss, estimated at around $5 billion for Q4. While the long-term potential remains, Reality Labs has yet to deliver meaningful profitability, raising questions about its sustainability. Investors will be keen to hear whether Meta plans any changes to its metaverse investments or if it remains committed to the long-term vision.

Regulatory pressures also pose a risk. The European Union’s Digital Markets Act and other privacy regulations continue to challenge Meta’s data-driven ad model. Any updates on compliance costs or potential fines will be closely monitored.

Investors should watch several key factors in this report. The first is Reality Labs’ strategy and whether losses continue to expand. Second, AI monetization will be crucial, particularly Meta’s outlook on AI-driven ad revenue and efficiency improvements. Third, regulatory challenges and their potential impact on revenue will be a point of concern. Fourth, Meta’s capex plans and Zuckerberg’s commentary on AI spending and competition with DeepSeek will be critical in shaping market reactions.

With all these moving parts, Meta’s Q4 earnings report is shaping up to be a pivotal event for the tech sector. While the company is expected to deliver strong financial results, the broader question remains: can Meta sustain its dominance in an evolving AI landscape? Investors will be closely watching Zuckerberg’s commentary for answers.

Q3 Recap

Meta Platforms delivered another strong Q3 earnings report, with revenue growing nearly 19% year-over-year to $40.6 billion, slightly exceeding analyst expectations. EPS of $6.03 beat consensus by $0.81, driven by strong advertising revenue growth of 19% and an 11% increase in average ad prices. The company also saw engagement gains across its platforms, with AI-driven recommendations increasing time spent on Facebook by 8% and on Instagram by 6%. However, despite the strong financial performance, investors reacted negatively to Meta’s announcement of accelerating capital expenditures, with shares dropping 3.6% after earnings. The company raised the lower end of its full-year 2024 capex guidance to $38-$40 billion, signaling that spending on AI infrastructure, including Meta’s Llama models and Reality Labs, will continue to rise in 2025.

While Meta’s advertising business remains strong, concerns about slowing revenue growth and rising spending are starting to weigh on investor sentiment. The company guided Q4 revenue between $45 billion and $48 billion, implying a further deceleration in year-over-year growth to around 16%, down from 19% in Q3 and 22% in Q2. Family Daily Active People (DAP) grew by 5% year-over-year to 3.29 billion, slightly below expectations, adding to concerns about user engagement trends. Despite these headwinds, Meta continues to prioritize AI-driven monetization, with over a million advertisers leveraging its generative AI tools to create more effective ad campaigns. Looking ahead, the focus will be on how the company balances aggressive AI investments with profitability, as the stock remains near all-time highs and faces growing competitive and regulatory pressures.

Price Action

Meta shares have surged 25% year-to-date in 2025, outperforming the broader tech sector as strong advertising demand and AI integration continue to drive revenue growth. Cost-cutting measures from 2024 have bolstered margins, and investor sentiment remains bullish, with 45 'buy' ratings from analysts and a median price target of $580. Key metrics to watch include daily active users, expected to reach 2.2 billion on Facebook, and engagement trends across Meta’s platforms, which influence automated trading strategies. While Reality Labs is forecasted to post another loss, investors are more focused on Meta’s AI advancements, which have enhanced ad targeting and strengthened its competitive position against rivals like TikTok. Despite potential regulatory risks, most analysts believe Meta's dominant market position and AI-driven growth outweigh these concerns, with the stock maintaining a strong uptrend above the 200-day moving average.