Meta's High-Stakes Earnings: Can AI Gambles Sustain Profitability Amid Mounting Costs?

As of last week, Meta (META) shares experienced a slight dip of 0.30%. Despite this recent downturn, the stock managed a 1.19% gain over the past week and has surged by 21.94% year-to-date. Meta's current market capitalization stands at approximately $1.79 trillion, reflecting its substantial position in the tech industry.

Meta is set to release its Q2 2025 earnings report this July 30 after market hours, with analysts raising questions about its AI investments and Reality Labs’ quarterly $4 billion cash burn. The tech giant faces scrutiny on whether it can maintain its 40% profit margin at the current valuation amid such heavy expenditures.

Market consensus anticipates Meta’s second-quarter revenue to hit $44.5 billion, marking a 14% year-over-year growth, along with an expected earnings per share (EPS) of $5.84. Despite Meta exceeding expectations for four consecutive quarters with an average beat of 18.5% — reaching as high as 23% last quarter — surpassing estimates by 10% of this magnitude might not sway investor sentiment significantly.

The real focus in this earnings report lies in whether Meta can sustain a profit margin over 40% despite its $70 billion AI infrastructure investment and $16 billion annual expenditure in Reality Labs.

Meta’s over $180 billion ad business continues to be its "cash cow," driving other ventures. AI-enhanced advertising tools have shown potential, increasing Reels conversion rates by 5% and user revenue to $49.63, up 11.28% year-over-year. Yet, growth challenges persist due to ad load saturation on Instagram and Facebook, shifting ARPU reliance from volume to pricing capability. Moreover, Meta encountered weaker-than-expected performance in the Asia Pacific, with Q1 revenue at $82.2 billion, short of the expected $84.2 billion due to cautious ad spending by Chinese exporters.

Meta’s AI strategy faces practical challenges, diverging from Silicon Valley norms. While competitors guard their models, Meta opens access to its Llama model, betting on ecosystem dominance. Its $600-700 billion capex plan underscores this commitment, further affirmed by the 11.28% increase in client ARPU.

Reality Labs continues to burn funds without clear profitability outlooks, drawing criticism as Zuckerberg’s expensive venture. However, Meta’s $96 billion operational cash flow supports such risks. The company's vision now spans beyond VR headsets to encompass broader ambitions, including next-gen computing platforms like AR glasses, neural interfaces, and yet-to-be-conceived innovations.

WhatsApp’s monetization has started unlocking its vast potential. With 30 billion users contributing merely $10-20 billion revenue annually, Wolfe Research sees opportunities in commercial communications generating $300-400 billion.

Meta faces fundamental dilemmas of high investment in new technologies against maintaining profitability to justify its $1.8 trillion valuation. Optimists view Meta as successfully pivoting through AI empowerment, WhatsApp monetization, and metaverse expansion while retaining profitability. Pessimists worry about peaking margins and growth slowing, fearing that massive bets may never pay off.

Currently, Meta garners unusual Wall Street enthusiasm, potentially overextended given valuation realities. Among 71 analysts, 63 advocate "buy" or "strong buy," with only one suggesting "sell," which can often herald disappointment. Meta boasts a TipRanks "10" score, the highest rating, yet faces just 2% upside potential at the average $732.63 price target.

Technical analysis reveals key thresholds: resistance at $720-725 and $745-750 levels, alongside support at $700, $680, and $650 points. Meta must surpass the $720 mark to counter bearish signals and retract its upward trajectory. Strong earnings could propel shares towards $750; however, missing expectations might accelerate declines, with the next support at $680.

Low trading volume during this breaching period suggests either a false break or market hesitation pending earnings results. The RSI remains neutral, indicating possible sharp movements in either direction.