Meta (ASX: FB) reported strong fourth-quarter earnings, with sales growing 24% to $60 billion. Operating margins contracted 700 basis points to 41% as AI-related costs continue to mount. The firm’s 2026 guidance calls for $125 billion in capital expenditures and $162 billion in operating expenses.

Why it matters: Meta’s ad business continues to perform at full capacity, with the firm’s investments in artificial intelligence continuing to drive metrics such as engagement, ad efficacy, and content recommendation.

  • Engagement metrics, including time spent on Instagram and Facebook, remain strong, with video engagement particularly strong. As users spend more time on its platform, Meta can show them more ads, driving ad impressions up 18% for the quarter.
  • We were similarly impressed by Meta leveraging its AI investments to drive growth in ad clicks (up 3.5% for Facebook) and conversions (1% increase for Instagram). While marginal, these improvements can unlock substantial topline dollars considering Meta’s scale.

The bottom line: We maintain our $850 fair value estimate for wide-moat Meta, with the firm’s outperformance on sales offset by its 2026 capital and operating expenses guidance coming in ahead of our estimates. Despite shares being up, we continue to view them as undervalued.

  • We think that as the year continues, investors will align with our bullish view on Meta as more datapoints regarding the impact of the firm’s AI investments on its core ads business come to the fore.

Coming up: Meta expects sales for the first quarter to grow a whopping 30%, driven primarily by a healthy demand for its ad products. We expect this strength to continue into the remainder of the year, and model 2026 sales growth at 25%.

  • We expect the launch of Meta’s latest large language model in the coming months, with the LLM likely to be competitive with frontier labs such as Google, OpenAI, and Anthropic.

Meta is a social media behemoth with strong growth ahead of it

We view Meta as the clear winner in social media. The firm’s application lineup, which includes Facebook, Instagram, WhatsApp, and Messenger, has close to 4 billion monthly active users, giving Meta unmatched scale in the sector.

The firm’s strategy is dual-pronged. On the user side, Meta has leveraged its scale and social media savvy to iteratively improve its product lineup, adding attractive features such as Stories, Reels, and even new products such as Threads. Such improvements/additions not only improve user engagement, but also allow Meta to monetize these features/products by layering advertisements onto them.

On the advertising side, Meta allows advertisers of all shapes and sizes to place ads in front of engaged users. The company has benefited greatly from a general shift toward digital advertising within the broader advertising market, with social media advertising gaining substantial share, especially since the covid-19 pandemic. To bolster its advertising business, Meta has invested heavily to improve its ad-targeting algorithms, allowing it to improve its advertisers’ return on ad spending and increasing its average revenue per user over time.

While the firm’s core business remains advertising, Meta has shown a proclivity to expand beyond its ad-based revenue model by investing heavily in hardware, via Reality Labs, and AI, by investing in its own Llama large language model. While the firm’s investments in Reality Labs have been demonstrably unprofitable, we are more optimistic about Meta’s investments in AI. We believe Meta’s AI investments, especially those aimed at improving the firm’s ad-targeting algorithms, are value-accretive.

Beyond ad-targeting, Meta is also investing in consumer-facing AI, via its Llama chatbot, which is accessible to users across its applications. While a monetization strategy for this chatbot remains elusive in the near term, we believe the firm could drive increased user engagement/time spent by allowing its users access to a chatbot assistant within Meta’s applications.

Bulls say

  • Meta’s core advertising business has benefited greatly through improved ad targeting and content recommendation algorithms as well as a secular increase in digital advertising spending.
  • Meta’s scale, with the majority of the world’s internet-connected users accessing its applications, allows it access to high-quality user data which it can package and sell to advertisers.
  • The firm has an opportunity to drive more ad inventory growth, leveraging new products such as Threads while also improving its monetization of ads on more nascent features such as Stories and Reels.

Bears say

  • Meta’s investments in Reality Labs and generative AI stand to lose the firm billions of dollars annually, taking some of the shine off its overall business.
  • The firm has a monopoly case against it in the US which could potentially force it to break up, severing some of the scale advantages it has built up over time.
  • Meta has disproportionately benefited from increased ad spending by Chinese retailers including Temu and Shein. A slowdown in spending by these firms could hit Meta’s growth.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.