While much attention is given to Nvidia and the AI semiconductor ecosystem for visible AI-driven hypergrowth trajectories, there is another quiet AI beneficiary emerging in Meta, with advertising revenue accelerating to the mid-20% range and YoY dollar growth surpassing $10 billion in Q3. Revenue forecasts continue to strengthen over the next few years with revisions of up to $30 billion, or up 10-14% since July, underscoring greater confidence in Meta’s ability to leverage AI to improve monetization.

More impressively, Meta’s AI ads automation platform has quietly reached a $60 billion run rate in Q3 in three and a half years from its launch. This is 3X Broadcom’s AI revenue and also 3X of OpenAI’s projected ARR of $20 billion for 2025, emphasizing how large of a platform Advantage+ is. Compared to Microsoft, AI contributed 16 points of growth in the April quarter, implying a run rate of around $16 billion assuming growth at a similar degree as the January quarter’s 175% YoY to $13 billion.

However, the thorn in Meta’s side stems from the compute and capex side, as the company is aggressively building data center capacity to prepare itself for the most optimistic scenarios of reaching superintelligence. Not only is capex guided to surge to over $100 billion in 2026, potentially creating another cash flow crunch reminiscent of 2022’s metaverse-linked spending spree, but expense growth is also expected to outpace revenue growth by a wide degree and weigh heavily on operating margin.

Advantage+ Reaches $60 Billion ARR

Meta’s flagship AI ads automation platform Advantage+, powered by Andromeda, is also key to the company’s strong ads performance, as Meta has been straightforward about the end-to-end platform driving strong return on ad spend for advertisers. Advantage+ automates campaign targeting, budget allocation, and creative generation, providing advertisers with an easy-to-use tool that integrates generative AI directly into Meta’s ad ecosystem.

Meta revealed earlier this year that “for every dollar spent on its AI-enabled Advantage+ products, advertisers generate on average $4.52 in revenue for their businesses,” or an increase of ~22% versus typical campaigns, highlighting how ad performance improves while using the platform.

In Q3, Meta emphasized that “Advantage+ continues to drive performance gains, [and] advertisers who run lead campaigns using Advantage+ are seeing a 14% lower cost per lead on average than those who are not.” This compares to a 10% lower cost per lead as of April, showing that the platform continues to drive results while lowering costs per lead.

More importantly, Meta disclosed that Advantage+ has surpassed a $60 billion annual run rate, just three and a half years after its launch. CFO Susan Li sees room to continue growing this run rate for Advantage+ and expanding adoption of the platform by focusing on driving continued performance improvements.

First Monetization Lever: Improving Ad Performance

Meta outlined two monetization levers in Q3 – improving ad performance, and an ability to continue delivering engaging content to users.

This first monetization lever stems from improving ad performance for its advertisers, mostly driven by the company’s three foundational models as well as its end-to-end ads automation platform Advantage+. Meta opts for tracking conversions to gauge ad performance, despite it being a complex metric to track considering advertisers can optimize for different types of conversions. CFO Susan Li stated that value-weighted conversion rates showed “very strong” YoY growth in Q3, outpacing impressions.

Meta’s three foundational models all serve a different function, with the same end goal of improving ad quality and conversions to drive higher ROI for advertisers:

GEM (Generative Ads Recommendation Model) is described by Meta as the ‘super brain’ that can rapidly process, catalog and analyze trillions of data points, to then recognize subtle patterns in user activity to provide the most relevant ads at the right time. Meta says GEM was rolled out more broadly earlier this year after initial testing on Reels saw GEM boost conversions by up to ~5%. GEM delivered a 5% increase in conversions on Instagram and a 3% increase on Facebook in Q2, and in Q3 Meta “doubled the performance benefit we get from adding a given amount of data and compute” to continue scaling training capacity at an attractive ROI.
Lattice is described as a ‘giant library’ that generalizes learnings across different campaign objectives (clicks, views, etc), surfaces (Reels, Story, Feed, etc) and subjects, in order to predict an ad’s performance. Lattice increases ad efficiency as it runs fewer models, while the knowledge-sharing effect increases ad quality and conversions – Meta said earlier this year that Lattice has increased ad quality by 12% and conversions by 6%. In Q3, Meta rolled out Lattice to app ads, driving a ~3% gain in conversions on that objective.
Andromeda is described as a ‘personal concierge’, or Meta’s vast ML ad recommendation and prediction system that, at its core, aims to predict exactly which ads a user will find the most interesting. For Andromeda, Meta says, “Imagine having a personal concierge who knows your tastes so well that they don’t just understand that you covet shoes, but that you like to wear red flip flops at the beach.” Meta said that in Q3, it significantly improved Andromeda’s performance by combining retrieval and early-stage ranking models, driving a 14% increase in ad quality on Facebook. Andromeda is also the core engine powering Advantage+ automation tools.

Moving to 2026, Meta discussed that it is “working on combining these 3 major AI systems into a single unified AI system that will effectively run our family of apps and business using increasing intelligence to improve the trillions of recommendations that it will make for people every day.”

A single model that combines the strengths of GEM, Andromeda and Lattice could theoretically understand user preferences and activity at a much deeper level, improve ad ranking quality, relevance and conversions across its family of apps, and save on inference. For example, Meta does not use GEM for inference as its size makes it too cost-prohibitive, rather it transfers knowledge to smaller run-time models; a single model incorporating GEM’s knowledge could potentially run inference in a more cost-effective manner.

Second Monetization Lever: Increasing User Engagement

On the second of increasing engagement, Meta is executing quite well, with improvements in its recommendation models helping drive time spent on its apps higher. More time spent then allows ad impressions to grow without substantially increasing ad load, underpinning this reacceleration in impressions growth seen in Q3 and more growth moving forward.

Management pointed out that “overall time spent on Facebook and Instagram grew double digits year-over-year, driven by continued video strength as well as healthy growth in nonvideo time on Facebook.” Video time spent on Instagram was more than 30% higher versus last year, while AI ranking optimizations helped drive 10% more time spent on Threads in Q3. This video growth has pushed Reels to a $50 billion annual run rate in Q3, up 5X from its last update in Q2 2023 when it reached a $10 billion run rate.

Improving ranking models remains a key focus for Meta moving through 2026, with management expecting new model innovations to help “significantly scale up the amount of data and compute we use to train our recommendation models in 2026, yielding more relevant recommendations.”

AI Aiding Meta’s Advertising Growth Flywheel

On a positive note, Meta is already seeing tailwinds from AI recommendation models driving higher ROI for advertisers and increasing time spent across its family of apps, fueling stronger advertising revenue growth.

In Q3, advertising revenue grew 25.6% YoY, accelerating more than nine points since Q1 and marking the fastest growth in six quarters. Ad impressions rose 14% YoY in Q3, accelerating from 11% in Q2 and marking a strong inflection from just 5% growth in Q1. Pricing remained steady, rising just one point to 10% YoY.

However, the dollar growth in advertising stands out more — Meta has delivered its two largest YoY growth quarters on a dollar basis in Q2 and Q3, at $8.23 billion and $10.2 billion, even outperforming Q4 2024’s holiday-boosted growth of $8.08 billion. This high dollar growth is poised to continue in Q4 2025, with guidance pointing to ~$9.3 billion to $10.7 billion in QoQ dollar growth.

Put another way, Meta is delivering larger YoY dollar growth in advertising revenue on a larger base – Q3 grew $10 billion YoY off a $40 billion base, versus $7.5 billion growth in Q3 2024 on a $33.6 billion base.

ARPP Continues to Accelerate Heading into Q4

Perhaps the most important metric for Meta’s ads monetization is ARPP (average revenue per person), with the metric continuing to accelerate in Q3 ahead of the seasonally-stronger holiday quarter. ARPP reached $14.46 in Q3, accelerating to 17.7% YoY from 14.8% in Q2. More impressively, this marked a record high for ARPP, surpassing Q4 2024’s seasonally stronger ARPP of $14.25.

This sets the stage for ARPP to push well beyond $15, potentially to $16 in the upcoming quarter, highlighting that Meta’s AI-driven ad performance improvements and monetization efforts are bearing fruit.

Meta’s Upcoming Capex Surge and Possible FCF Crunch

Some of the most important quotes from Q3’s call circled back to Meta’s view on capex and why it believes aggressive expansion of capacity and thus capex is a necessity. CEO Mark Zuckerberg believes it is the “right strategy to aggressively front-load building capacity so that way we're prepared for the most optimistic cases” on when AI superintelligence arrives, so Meta is prepared to capitalize on this opportunity.

If building superintelligence takes years longer than expected, Zuckerberg says Meta can “use the extra compute to accelerate our core business which continues to be able to profitably use much more compute than we've been able to throw at it. And we're seeing very high demand for additional compute, both internally and externally.

These comments underscore why Meta is aggressively raising its capex spending this year and next – Zuckerberg believes that the upside potential of superintelligence is so large that it is worth the risk of overbuilding to not fall behind OpenAI or Google (with compute capacity being the main advantage), with Meta able to use extra compute in the meantime to improve core AI ad capabilities and drive growth.

However, the tradeoff for this is lower free cash flow and potential operating margin headwinds. Meta expects capex dollar growth to be “notably larger in 2026 than 2025,” while total expenses “will grow at a significantly faster percentage rate in 2026” driven by infrastructure costs, incremental cloud costs and depreciation, followed by employee compensation.

This implies 2026 capex of at least $103 billion, as current guidance for 2025 at $70-72 billion implies a minimum of ~$32 billion YoY growth. However, considering management’s comments for notably larger dollar growth, there is potential for capex to come in at or above $110 billion, up ~55% YoY, above current estimates for $107.9 billion. Put another way, Meta could spend ~$30 billion more in 2025 and 2026 than it did in 2019 through 2024 combined.

The capex surge will potentially cause another free cash flow crunch similar to 2022, with current consensus estimates pointing to FCF of $19.71 billion in 2026, down nearly (50%) YoY and (63.5%) from 2024.

Expense Growth to Meaningfully Outpace Revenue Growth in 2026

Tying into capex is Meta’s expectation for expense growth to be significantly faster in 2026 versus 2025, which means expense growth will outpace revenue growth by a wide margin, potentially as much as a factor of 2x.

For perspective, Meta is forecasting total operating expenses of $116-118 billion this year, up 22-24% YoY, marginally outpacing estimated revenue growth of 21.3%. This is crucial heading into next year as a lack of meaningful gross margin expansion means this growth will directly pressure operating margin.

If expenses grow at ~30% YoY in 2026, this would project total expenses in the range of ~$151-153 billion, significantly outpacing expected revenue growth of 17.9% to $234.7 billion. This would also project out to an operating margin of ~35%, marking a relatively sharp contraction back to the lowest levels since early 2023.

If expenses grow faster, at say 2X estimated revenue growth or ~35% YoY, this would project expenses in the range of ~$157-159 billion. While only slightly higher than the ~30% growth forecast, this would bring operating margin down to 32.5%-33%.

JP Morgan’s Doug Anmuth questioned management about this capacity expansion strategy and how this spending ties to earnings and cash flow:

“I appreciate the strategy to front load capacity for superintelligence. Can you just talk about your thought process and kind of triangulating the Capex dollar growth and the significantly faster expense growth next year with core growth in the business and then the impact on earnings and free cash flow? And do you have targets that we should be thinking about for cash on hand or net cash overall?”

CFO Susan Li offered a lengthy discussion in response that offered no clarification on earnings or cash flow impacts, and hinted that Meta may not be worried about those two line items in this buildout:

“But to date, we keep on seeing this pattern where we build some amount of infrastructure to what we think is an aggressive assumption. And then we keep on having more demand to be able to use more compute, especially in the core business in ways that we think would be quite profitable than we end up having compute for.

So I think that, that suggests that being able to make a significantly larger investment here is very likely to be a profitable thing over some period… Now I mean, it's, of course, possible to overshoot that, right? … And then the kind of the very worst case would be that we effectively have just prebuilt for a couple of years, in which case, of course, there would be some loss and depreciation, but we'd grow into that and use it over time.”

On the point of Meta’s 2026 budget still being put into place, reports surfaced that Meta is considering making budget cuts of up to 30% in its metaverse division, Reality Labs, which is currently burning about ~$20 billion per year. This could save several billion if put into place, though there is potential for that money to simply be reallocated towards data center capex.

Financials

Revenue Growth Accelerates to 26%

Meta reported revenue of $51.24 billion in Q3, accelerating more than 4.5 points to 26.2% YoY, the highest growth since Q1 2024. This also marked an impressive reacceleration from 16% growth in Q1 2025.

For Q4, management guided to revenue between $56 to $59 billion, up 18.8% YoY at midpoint, driven by expectations for strong ad revenue growth, partially offset by lower YoY revenue in Reality Labs from lapping the Quest 3S introduction. For 2025, revenue is expected to grow 21.3% to $199.5 billion, before decelerating to 17.7% growth to $234.7 billion in 2026.

Annual Revenue Revisions Seeing Sharp Increase Since July

What’s notable on the revenue front is the sharp upward revisions to annual revenue estimates, with 2026 and 2027 moving sharply higher since this summer.

Back in July, prior to Q2’s earnings, Meta was expected to generate $215.1 billion in revenue, with that now sitting at $234.7 billion. On a YoY basis, growth has been revised from 14.0% to 17.7%, a smaller uplift considering 2025 comps have toughened, having risen from 14.7% to 21.3% over the same period.

For 2027, Meta was expected to generate $240.6 billion in late July, with that now sitting at $271.0 billion, with YoY growth moving from 11.9% to 15.5% on a higher base.

Key Metrics

Meta’s key metrics strengthened broadly in Q3. Ad impressions growth accelerated three points to 14% YoY, its fastest growth since Q1 2024. Pricing has remained relatively stable at 10% YoY in Q3, up one point sequentially, driven by increased advertiser demand fueled by improved ad performance.

Family of apps daily active people (DAP) also accelerated to 7.6% YoY to 3.54 billion, up from 6.4% growth last quarter and marking its fastest growth since Q4 2023.

Operating Margins Contracts Sequentially

Despite the topline reacceleration in Q3, Meta’s operating margin contracted as expenses grew 32% YoY, six points faster than revenue growth.

Gross margin was 82% in Q3, up 0.2 points YoY but down 0.1 points QoQ.
Operating margin was 40%, down 2.7 points YoY and 3.0 points QoQ. Aside from Q4 typically being seasonally stronger, the expense guide for next year suggests operating margin could return to the mid-30% range.
Net margin was 5.3%, negatively impacted by a one-time, non-cash income tax charge of $15.93 billion; excluding this charge, net margin would’ve been 36.4%, down 2.3 points YoY and 2.2 points QoQ.

Earnings

Due to the income tax charge, Meta reported $1.05 in GAAP EPS; adjusted for this charge, EPS was $7.25, compared to estimates for $6.67.

Looking ahead, GAAP EPS growth is expected to remain approximately flat for the next three quarters due to the margin pinch from rising expenses:

Q4 GAAP EPS estimated at $8.17, up 1.9% YoY.
Q1 ’26 GAAP EPS estimated at $6.32, down (1.7%) YoY.
Q2 ’26 GAAP EPS estimated at $7.08, down (0.8%) YoY.

For FY25, Meta is expected to deliver a (2.2%) decline in GAAP EPS to $23.34, with the decline primarily due to Q3’s income tax charge-related miss. Earnings growth is expected to rebound to 27.3% to $29.72 in 2026.

Cash and Balance Sheet

Operating and free cash flow margins expanded sequentially, though Meta is expected to see a steep free cash flow crunch moving through 2026 as a result of surging capex (which also does not reflect the company’s true spending on data center infrastructure).

Operating cash flow was $30.0 billion in Q3 for a 58.5% margin, down from a 60.9% margin in the year ago quarter but up from a 53.8% margin in Q2.
Free cash flow was $10.63 billion for a 20.7% margin, down sharply from a 38.2% margin in the year ago quarter but up from 18% in Q2.
Q3 capex rose 110.5% YoY to $19.34 billion, driven by investments in servers, network infrastructure and data centers. Based on 2025’s capex guide, which was raised to $70-72 billion (up 81% YoY at midpoint), Q4 capex is on track to be ~$21 billion, up 41.5% YoY.

Creative Funding Solutions Not Appearing in Capex, Saving Cash

Another important point to cover is Meta’s use of creative financing solutions to build out its large scale data centers, such as its joint venture with Blue Owl to fund its Hyperion data center in Louisiana. The additional costs are not appearing in capex but rather in ‘other investing cash flows’.

Under the JV deal, Blue Owl will own 80% and Meta will retain a 20% stake, overseeing construction and ultimately renting the data center once operational. However, concerns are rising about the deal structure, as the WSJ points out that the facility is “financed with debt, and neither the data center nor the debt will be on [Meta’s] own balance sheet.”

Truist analysts questioned CFO Susan Li about the JV and how it will appear in and affect capex:

“And then Susan, how do you see the on-balance sheet versus off-balance sheet financing of your AI initiatives? You've recently struck a deal with Blue Owl for the Louisiana data center. Is that part of the CapEx guide for '26? And if it's not, how significant will that way of funding be for Meta going forward? And basically, would that slow down your CapEx growth past 2026?”

CFO Susan Li: “So the JV that we announced with Blue Owl is sort of an example of finding a solution that enabled us to partner with external capital providers to codevelop data centers in a way that gives us long-term optionality in supporting our future capacity needs just given both the magnitude, but also uncertainty of what the capacity outlook in future years looks like.

In terms of how that is recognized as Capex, our prior Capex reflected a portion of the data center build cost prior to the joint venture being established. Going forward, the construction cost of the data center will not be recorded in Capex as the data center is constructed, we will contribute 20% of the remaining construction costs required, which is in line with our ownership stake, and those will be recorded as other investing cash flows.”

Valuation

Meta’s shares are trading slightly above its median forward PS valuation since the start of 2024 at 8.1x, though this has compressed from 9.4x in prior to Q3 earnings in late October after shares sold off.

On the bottom line, Meta is valued at around a 25x forward PE, slightly above its 5-year median of 22.2x, though the company had traded as low as the single-digits in late 2022 and early 2023 when its metaverse spending spree cut into operating and net margins. Looking out to 2026, Meta trades at ~22x current EPS estimates, slightly above its average of 20.7x since the start of 2024.

However, where the valuation gets stretched is on the free cash flow side – looking ahead to 2026 and the projected $19.7 billion in free cash flow (subject to change with capex forecasts), Meta trades at 85x estimated 2026 FCF. This would represent a significant deterioration of this multiple from the current 38.3x and represent the most expensive Meta has traded on an FCF basis since shortly after its IPO.

Conclusion

The most recent earnings report proves that Meta is using AI internally to materially move the needle. Meta’s Advantage+ automation tools continue to drive measurable improvement in advertising efficiency with an updated annual run rate that exceeds $60 billion – a substantial run rate considering this was launched only three years ago.

Across the board, there was a noticeable reacceleration in impressions, and ARPP was at a fresh record despite it not being the company’s seasonally strongest quarter. Plus, Reels is also up 5X in two years, reporting a $50 billion run rate following improvements in the AI-driven video content recommendation system.

However, the main risks to Meta’s thesis lay within its ambitious capacity expansion plans, with management laying the framework for easily over $100 billion in capex in 2026 and notably stronger expense growth. This is not only expected to create a large FCF crunch similar to 2022, back to <$20 billion, but also a substantial headwind to operating margins and thus EPS.

There’s an ongoing glass-half-full versus glass-half-empty debate in AI — enormous potential on one side, significant cost on the other. We remain firmly in the glass-half-full camp. But if the market chooses a glass-half-empty view, we also know that lower prices often create some of the best long-term opportunities.

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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