Meta 3Q25 Business Update: AI is Working

(Speedwell Members can read a PDF version of this post here)

3Q25 Update.

Meta reported 3Q25 and the stock dropped -8% after hours. Their core apps looked as healthy as ever with Daily Active People reaching 3.5 billion, +8% y/y. Instagram surpassed 3 billion MAUs for the first time ever and even Threads is gaining momentum with 150 million DAUs. (Twitter/ X is estimated to be around 290mn).  

On the call Mark Zuckerberg noted that AI has driven 5% more time spent on Facebook and 10% on Threads. Video time spent on Instagram is up more than 30% from last year. Overall time spent on Facebook and Instagram is up double digits y/y. All of these improvements are largely attributable to AI advancements.

Revenue growth accelerated to +26%, +400bps from last Q. This was driven by Ad impressions growth of +14% (vs +11% last Q) and Ad prices increased +10% (vs +9% last Q).

They disclosed that Reels is run rating $50bn and the run-rate of ad revenue from end-to-end powered AI tools surpassed $60bn.

Expenses and capex continued to climb. Total costs and expenses were +32% y/y which drove operating deleveraging. This was driven by a +36% jump in R&D to $15.1bn as they increased spending on their Meta Super Intelligence Labs efforts.

Operating margins were 40%, down -300bps sequentially. FOA margins were similarly pressured and landed at 49% for the quarter. This quarter’s expenses were higher than the total year’s expense guidance of +22-24% y/y.

A non-cash adjustment from the One Big Beautiful Bill Act resulted in a $15.9bn tax charge.  Excluding the tax charge, EPS would have been $7.25 for the quarter, +20% y/y.

LTM they earned $28.78 a share, backing out the one-time tax charge.

Business Commentary.

Usage, engagement, and ad efficacy are no longer issues. All of their AI spending is driving better ad recommendations and measurement, which is decreasing costs for advertisers. Just one of many proof points mentioned on the call is “advertisers who run lead campaigns using Advantages are seeing a 14% lower cost per lead on average than those who are not”. Advantages is the name of their suite of AI tools that they rolled out a couple years back and have since continued to improve.  

Overall, it was another strong quarter of execution with strong revenue growth and improvements from AI materializing in their products.

While they continue to lose ~$4.4bn a quarter in the Reality Labs division, even this effort no longer seems as lost as it did a few years ago. With Apple’s Vision Pro not a clear leader in this space and Meta’s Ray-Bans a more popular formfactor, it isn’t impossible to think that Meta will continue to lead the space of AR/VR. The ROI of this investment may still be dubious, but at least fewer investors are probably writing this division off to zero.

However, one nagging question remaining… how much capex is needed to support the business versus grow it.  

They increased the floor expectation of capex to $70-72bn. But this is only the beginning. As they noted on the call, “our current expectation is that capex dollar growth will be notably larger in 2026 than 2025. We also anticipate total expenses will grow at a significantly faster percentage rate than 2025, with growth primarily driven by infrastructure costs, including incremental cloud expenses and depreciation.”

Some estimates have floated around that this will surpass $100bn next year. Despite record levels of operating cash flow that reached $87bn LTM, free cash flow is just $23bn.

Their LTM operating income of $82bn may still look strong, but this is going to continue to shrink as their increased capex starts to flow more through the P&L. With their Capex to D&A ratio of 3.7x, deprecation is mathematically going to continue to be a strong headwind to earnings going forward. It is a 4-5 year period before the new elevated capex rate is incorporated into their depreciation expense.

On the other hand, and as we talked about in last quarter’s update, not all of this spend will be maintenance capex. And so, when an investor is thinking about normalized earnings, they do not necessarily need to fully burden all of earnings for the full capex amount. How much though will be a key question for investors to think about. (We took a stab at this math in last quarters update).

There are two branches on the decision tree here: 1) either the elevated capex continues, or 2) it doesn’t and perhaps some of it was a waste. In the event of the first scenario, it is only likely to continue if the spending shows more progress in terms of AI advancements, better ad targeting, and better user engagement. Meta may invest for a while ahead of seeing results, but they won’t do so forever.

In the second scenario, where some of the spending was a waste, they will eventually use that capacity (or could resale it) and investors can move on happily knowing that the business doesn’t need $100bn of capex.

There is a corollary point to this though. And that is that if a lot of this spending turns out to be excessive, does that mean they no longer see growth improvements? Meta is only willing to spend this amount because they believe it will extend their growth runway—where is the limit to this?

It is unclear how much of the growth is from the sheer growth in computing power versus just better AI models (which may be able to get by with less compute overtime as they get more efficient). This implies that they can continue to grow without necessarily laying out massive investments in new data centers. An investor is unlikely to find answers to these questions today, which is why we like to invert the problem to see what is priced in.

Valuation.

At a price of $690, Meta trades at 24x earnings. We could adjust out Reality Labs losses, but if you recall from last quarter’s update, we coincidentally found that these losses are about equal to the conservative depreciation adjustment we made. (Check out the full post here for details). Most investors will probably not find 24x particularly offensive nor exciting. At that multiple, an investor would need be comfortable assuming a low double digit growth rate for over half a decade in order to get a historical market return of ~10%.

With our Reverse DCF below we show more precise scenarios and what the implied return would be.

As a reminder we sensitize around three different EBIT assumptions. The 25% assumption is more pessimistic on how much capex in maintenance capex, whereas the 45% assumes more of the capex is for growth. (The capex assumptions will eventually show up in the margin assumptions as it raises the asset base that is depreciated).

We left our revenue growth rate scenarios unchanged from last quarter with a low growth rate of 5% and the highest at 15%. The high end growth rate is what Meta is doing today but remember that it was much lower than this just two years ago (negative growth in 2022 and 16% in 2023). A 15% growth for 5 years is a doubling of revenue.

Below are the outputs of the reverse DCF. An investor who wants to achieve at least a historical market-like return would need to be comfortable assuming 10%+ revenue growth and 40%+ margins. Conversely, an investor may also believe that their higher confidence in Meta’s business could warrant a lower return. If Meta could grow 20%+ for several years, then their return would likely be closer to a low-teens rate. Members Plus can download the reverse DCF and adjust the scenarios accordingly.

Call Notes.

Tax Charge

  • “Our tax rate for the quarter was 87%, which was unfavorably impacted by a onetime noncash reduction in deferred tax assets that we no longer anticipate using under new U.S. tax law. Our tax rate would have been 14%, excluding this charge.”
  • “We expect a significant reduction in our U.S. federal cash tax payments for the remainder of 2025 and future years due to the implementation of the One Big Beautiful Bill Act. However, the implementation also led to the recognition of a valuation allowance against our U.S. federal deferred tax assets, reflecting the impact of the U.S. Corporate Alternative Minimum Tax. As a result, the third quarter 2025 provision for income taxes includes a onetime, non-cash income tax charge of $15.93 billion.”

FOA

  • 3.5bn daily active users
  • FOA revenue up +26% y/y
  • Instagram hit 3bn monthly active users
  • Reels now has an annual run rate of over $50 billion
  • Threads passed 150mn daily active users, ads now running globally

Ads

  • Ad impressions increased +14% y/y. Noted healthy engagement in all regions with video services driving the most engagement.
  • Average price per ad increased +10% y/y due to increased advertiser demand and improved ad performance.

Time Spent

  • “Across Facebook, Instagram and Threads, our AI recommendation systems are delivering higher quality and more relevant content, which led to 5% more time spent on Facebook in Q3 and 10% on Threads. Video time spent on Instagram up more than 30% since last year. And as video continues to grow across our apps, Reels now has an annual run rate of over $50 billion.”

Frontloading Capacity

  • “I think that it’s the right strategy to aggressively frontload building capacity so that way we’re prepared for the most optimistic cases. That way, if super intelligence arrives sooner, we will be ideally positioned for a generational paradigm shift in many large opportunities.”
  • “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, then we end up having compute for that suggests that being able to make a significantly larger investment here is very likely to be a profitable thing over some period.”

Meta AI

  • 1bn monthly active users
  • “People have created over 20 billion images using our products. And since launching Vibes within Meta AI in September, we have seen media generation in the app increased more than tenfold.”
  • “Within our Advantage Plus Creative Suite, the number of advertisers using at least 1 of our video generation features was up 20% versus the prior quarter as adoption of image animation and video expansion continues to scale.”

Vibes

  • “Vibes which is the next generation of our AI creation tools and content experiences. Retention is looking good so far. And its usage keeps growing quickly week over week. I’m looking forward to ramping up the growth of Vibes over the coming months. I think that Vibes is an example of a new content type enabled by AI, and I think that there are more opportunities to build many more novel types of content ahead as well.”

Reality Labs

  • 3Q revenue grew +74% y/y (their highest yet) to $470mn due to retailers stocking up on Quest headsets ahead of the holiday season and is lapping the launch of the Quest 3 which was released.
  • “The new Ray-Ban Meta glasses and Oakley MetaVanguards are both selling well. They sold out in almost every store within 48 hours with demo slots fully booked through the end of next month. So we’re going to have to invest in increasing manufacturing and selling more of those This is an area where we are clearly leading and have a huge opportunity ahead.”

Expenses

  • 3 factors contributing to accelerated expense growth: 1) legal, 2) employee compensation accelerated, and 3) growth in infrastructure costs due to increased operating costs

Meta Business AI

  • “We’ve been opening access in recent months to more businesses within our initial test markets, the Philippines and Mexico. And I’ve seen strong usage with millions of conversations between people and business AIs taking place since July. This month, we expanded availability within WhatsApp and Messenger to all eligible businesses in Mexico and the Philippines.”

Capital Allocation

  • “Our primary focus is deploying capital to support the company’s highest order priorities including developing leading AI products models and business solutions. As we make significant investments in infrastructure to support this work, we are focused on preserving maximum long-term flexibility to ensure we can meet our future capacity needs while also being able to respond to how the market develops in the years ahead. We’re doing so in several ways. — including staging data center sites so we can spring up capacity quickly in future years as we need it as well as establishing strategic partnerships that give us option value for future compute needs.”

Capex

  • “We currently expect 2025 capital expenditures, including principal payments on finance leases to be in the range of $70 million to $72 billion.”
  • “Our current expectation is that CapEx dollar growth will be notably larger in 2026 than 2025. We also anticipate total expenses will grow at a significantly faster percentage rate a than 2025, with growth primarily driven by infrastructure costs, including incremental cloud expenses and depreciation.”

Blue-Owl Joint Venture

  • “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. 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.”

*At the time of this writing, one or more contributors to this report has a position in Meta. Furthermore, accounts one or more contributors advise on may also have a position in Meta. This may change without notice.