Meta: Once again, Zuckerberg is excited to spend money. Why is the market not panicking this time?

Hello everyone, I am Dolphin research!

$Meta Platforms(META.US) released its Q4 2024 financial report after the market closed on January 29th, Eastern Time. Here are the key points:

1. Controversial guidance? No thunder, no sugar: At the end of the fiscal year, the market generally pays more attention to the company's operational plans and performance guidance for the next year rather than the current performance. Even a decent guidance can lead investors to overlook the "thunder" of current performance. So let's first look at the guidance:

(1) The revenue guidance for Q1 2025 is in the range of $39.5 billion to $41.8 billion, with a growth rate of 8% to 15%. However, this includes a 3-point drag from the high exchange rate of the dollar, so the actual growth rate is 11% to 18%, with a revenue scale under constant exchange rates in the range of $40.5 billion to $43 billion.

Looking solely at BBG's consensus expectations, it would definitely be a disaster. However, in reality, market expectations, especially those from leading investment banks and buy-side analysts, have been adjusted downward based on advertisers' channel research. For instance, some investment banks' latest expectations are around $40 billion to $41 billion.

Additionally, the impact of the high dollar exchange rate cannot be ignored, especially for Meta, which derives more than half of its revenue from non-North American regions. Referring to investment banks' expectations for growth under constant exchange rates, it is also around $41.5 billion. Therefore, while Meta's guidance is not a surprise, it certainly cannot be considered a disaster.

The company did not provide revenue guidance for the entire year of 2025, and I believe this may depend on the pace at which management leverages AI tools for monetization this year.

(2) Regarding the outlook for expenses, management guided that total Opex will be between $114 billion and $119 billion, and Capex will be between $60 billion and $65 billion.

Zuckerberg just announced Capex a few days ago, so there was no expectation gap. However, there is a significant expectation gap between buy-side and sell-side regarding Capex. Sell-side expectations are generally below $60 billion, while buy-side expectations are $60 billion to $65 billion, consistent with the company's guidance. Therefore, when it was announced a couple of days ago, it was not directly interpreted as a negative signal indicating that profits would be significantly pressured.

The Opex guidance is actually in line with the market's latest expectations (higher than BBG's consensus expectations), with growth mainly coming from the amortization and depreciation of previous AI infrastructure investments. It is worth mentioning that, as I noted in last quarter's financial report, starting this year, the average depreciation period for Meta's overall servers will be extended from 5 years to 5.5 years (the depreciation period for peers like Microsoft and Google is 6 years). This adjustment in the depreciation period will save $2.9 billion in expenses for Opex this year.

Overall, the guidance that garnered the most market attention this time is, on the whole, neither surprising nor disappointing. Although no full-year revenue expectations were provided, based on the increases in Opex and Capex, if AI does not bring more direct monetization revenue, then the pace of profit margin improvement this year is likely to halt 2. Current Highlights? Continuing to Improve Efficiency: The current performance in the fourth quarter was actually better than expected, with the main highlight being profitability.

On one hand, revenue slightly exceeded expectations, mainly because in the fourth quarter channel surveys indicated that advertisers' spending on Meta was generally at a basic inline level. However, due to regulatory pressures on medical advertising, Meta made internal adjustments on the platform in the fourth quarter, which affected the scale of healthcare advertising compared to last year and is expected to continue into the entire year of 2025.

As a result, since early January, the market has made some downward adjustments to Meta's Q4 and 2025 advertising expectations, which are somewhat subdued compared to the previous quarter.

On the other hand, Meta is still controlling costs. Compared to the previous quarter, if we exclude the impact of legal expense reversals, Q4 operating expenses grew by 10%. Aside from relatively high R&D expenses, management and sales expenses were almost flat compared to the same period last year. Ultimately, the operating profit margin increased by 6 percentage points quarter-over-quarter, with 3 percentage points coming from legal expense reversals.

3. No Pressure on Advertising Growth? It Will Come: Advertising growth in the fourth quarter was nearly 21%, soaring despite a higher base. However, the market is clearly prepared for a slowdown, and expectations are likely to be more subdued due to the results of channel surveys and the impact of regulatory policies on medical advertising.

Dolphin believes that the expectation gap here may stem from the performance of small and medium-sized businesses. Investment banks typically conduct channel surveys with medium to large advertising agencies, but Meta's recent application of AI in advertising, in addition to improving content recommendation accuracy and alleviating the impact of IDFA, has also provided businesses with more marketing tools, automating and smartening up the processes of ad creation, event planning, and media buying as much as possible.

For example, the company mentioned that over 4 million advertisers are currently using at least one AI marketing tool. Clearly, this group is mostly comprised of small and medium-sized businesses.

So will Meta's subsequent revenue growth "return" to a slowing trend? Dolphin still believes the probability is high, not only due to the high base and exchange rate effects but more fundamentally due to user traffic issues:

The two main monetization platforms, Facebook and Instagram, have seen user engagement significantly slow down since the third quarter after a two-year increase, with FB's usage time experiencing negative growth for two consecutive quarters.

Moreover, the potential benefits originally brought by the TikTok ban have become increasingly uncertain due to Trump's intervention, and at least for now, the possibility of TikTok remaining secure is not low.

The relationship between advertising volume and pricing also reveals some issues. Starting from Q2 2024, advertising revenue has relied mainly on CPM-driven growth for three consecutive quarters, reflecting the current strength of the U.S. economy and Meta's relative competitive advantage (including the penetration of AI tools).

However, it seems that exposure volume is increasingly difficult to grow. While there are factors of active adjustment by the company, it cannot be ruled out that the ad loading rate on existing platforms is too high, which has indirectly affected user experience. In Q4, due to the increased risks as the TikTok ban period approaches, but with high demand during the shopping season, some advertisers may have shifted their marketing budgets between platforms, potentially bringing some temporary incremental growth to Meta Of course, Meta can also make up for the supply by continuing to release advertising inventory for products like Message, Threads, and Marketplace, but overall, Dolphin Jun still tends to believe that advertising revenue will experience a slowdown trend this year.

4. New products + shopping season, but VR performance is "average": The revenue of Reality Labs related to VR in the fourth quarter was $1.08 billion, a year-on-year increase of only 1%. In fact, the new product Quest 3S, a more cost-effective version of Quest 3, was just released at the end of September, but it seems to have not generated much impressive performance, such as stimulating demand from incremental users. More often, it is the result of the old and new products offsetting each other under unchanged total demand.

5. Cash usage and shareholder returns: At the end of the fourth quarter, Meta had a total of $77.8 billion in cash and short-term investments, with a net cash of $49 billion after deducting long-term borrowings, an increase of $7 billion from the previous quarter. This quarter's free cash flow was $13.1 billion, with dividends of $1.27 billion, and the shareholder return for 2024 (buybacks of $29.8 billion + dividends of $5.1 billion) has a total yield of 2%.

6. Performance indicators overview

Dolphin Jun's viewpoint

Overall, the Q4 financial report is a performance without surprises or disappointments, although the market reaction after this performance (first dropping then rising) is not unrelated to the guidance controversy. However, Dolphin Jun believes that the game of guidance and expectations mainly brings short-term stock price fluctuations, which require high-frequency data and more rigorous tracking, making it difficult for ordinary investors. From a mid-term perspective, which is more inclined to qualitative logic of fundamental turning points, and from a long-term perspective, it can be said to be a logic of capital faith. Therefore, we also recommend making some relatively certain judgments from a mid-to-long-term perspective.

Meta has enjoyed the benefits of AI efficiency in advertising (ROAS) for two years, including compensating for the impact of IDFA on advertising tracking effectiveness and helping Reels accelerate content recommendations, etc. However, as the user time growth of the core platform Instagram in Q4 gradually approaches flat, and even the user time per individual shows negative growth, it indicates that AI's effectiveness in advertising for existing platforms is also slowly nearing its end.

Moreover, Trump's "lifeline" for TikTok has caused Meta to lose almost a piece of meat that was almost in its mouth (investment banks predict that if 10% of TikTok's user time is taken by Meta, it is expected to increase EPS by nearly 2%), and various signs indicate that TikTok has a good chance of surviving.

Therefore, the market's growth expectations for Meta in 2025, in addition to releasing new advertising inventory (Threads, Marketplace, etc.), are also starting to target the direct monetization of Meta AI and other AI tools. Currently, from a ToB perspective, over 4 million advertisers have engaged with Meta's Gen-AI tools. From a ToC perspective, the company has revealed that it will not directly charge for monetization for the time being. As of the beginning of the year, Meta AI's monthly active users have reached 700 million, with a target of 1 billion for this year. In other words, on Meta AI, 2025 is still a high investment + low output product.

In addition, the market is more focused on discussions about profits. Operating expenses with a growth rate of over 20% and capital expenditures with a growth rate of over 50% will undoubtedly put pressure on operating profits and cash flow in 2025. Therefore, how to invest efficiently, directing funds to areas that are most beneficial for (medium to long-term) revenue growth, as well as how management can improve employee efficiency and alleviate the pressure of high investment through effective internal organizational management, are the main concerns of the market. A few days ago, when the 2025 Capex guidance was announced, Mark Zuckerberg briefly mentioned several investment directions (Meta AI, Llama 4.0, AI engineers, etc.), but more details are expected to be discussed in this earnings call.

From a valuation perspective, the current market for Meta mainly revolves around a 25x P/E valuation line based on performance expectations for the next year. Although there is no obvious bubble, it is undeniable that optimistic sentiment is prevalent.

At the beginning of the year, Meta announced a 5% layoff, and in 2025, the depreciation period for servers will also be extended. However, the Opex guidance indicating a growth of over 20% suggests that from a medium-term perspective of about a year, Meta may still face the trend of pressured profit growth due to slowing revenue and increasing expenses. Especially in the first half of the year, it will also be affected by the high dollar exchange rate dragging down growth.

From a long-term perspective, Dolphin is somewhat more optimistic. In the past week, due to the Deepseek computing power reduction issue, U.S. tech stocks have been hit hard. For Meta, the cost-effective Deepseek makes the high investment in Llama, which is also an open-source large model, look particularly awkward in comparison. However, precisely because Llama is open-source, the acceptance and iteration speed of new technological solutions will also be faster. Moreover, with exclusive user data and monopolistic user social scenarios, Meta, while maintaining a strong barrier to traffic entry, is expected to achieve more efficient output through computing power reduction training solutions.

The following is a detailed interpretation.

Advertising exceeds expectations again

In the fourth quarter, Meta's revenue reached 48.4 billion, a year-on-year increase of 21%. Although the base in the fourth quarter is higher, Meta has slightly accelerated. The main contributor to the surprise is still the advertising business, which accounts for 98%, while VR performed only moderately under the dual benefits of new products and the shopping season.

Entering 2025, the company’s revenue guidance for Q1 is:

Meta's management expects total revenue for Q1 2025 to be in the range of 39.5 to 41.8 billion, corresponding to a year-on-year growth of 8% to 15%. Excluding the impact of exchange rates, the growth rate is expected to be in the range of 11% to 18%, with a median of 15%, which aligns with the natural trend of slowing growth.

Of course, if Meta continues to provide guidance in its traditionally conservative and low-key style, then the implied revenue outlook for the next quarter is likely to closely align with the upper limit of the guidance or directly exceed expectations to reach over 15% (FX over 18%). This growth performance would be quite impressive Specific business breakdown:

1. Advertising business: Continued reliance on price growth

For the advertising business, Dolphin has consistently preferred to separate the current volume and price growth trends for better understanding of the current macro environment, competition, and other issues.

(1) In the fourth quarter, the growth rate of advertising impressions continued to slow to 6%, but the user base is still expanding (the total daily active users in the ecosystem increased by 5% year-on-year), resulting in an average impression per user only slightly increasing by 0.9%. Although there are factors related to the company's proactive adjustments, it cannot be ruled out that the current platform's ad loading rate is too high, which has indirectly affected user experience.

Starting from Q1 2024, Facebook will no longer disclose the monthly active user data for its main site and ecosystem. Therefore, Dolphin mainly refers to the user duration data tracked by third-party platforms (Sensor Tower) to observe trends:

The following shows that IG's user duration is still barely maintaining positive growth, while FB has turned negative for two consecutive quarters.

(2) In the fourth quarter, the average advertising price increased by 14% year-on-year, accelerating compared to the previous quarter. Dolphin believes that Meta is still able to continue growing the average advertising price despite the already very high CPM.

The main reasons are:

In addition to maintaining high CPM quotes (the macro environment is stable, digital advertising is growing normally, and CPG advertisers, under operational pressure, are intentionally shifting more budgets to high ROI social media, thus solidifying Meta's competitiveness), the improvement in Reels fill rate and the simultaneous increase in Reels' CPM with enhanced competitiveness may also include the incremental benefits brought by merchants using advertising AI tools.

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2. VR: New Products + Shopping Season, Still Not Enough to Stand Out

The revenue of Reality Labs related to VR in the fourth quarter was $1.08 billion, a year-on-year increase of only 1%. In fact, the new product Quest 3S, a more cost-effective version of Quest 3, was just released at the end of September, but it seems to have not generated much impressive performance, such as stimulating demand from incremental users. More so, it is the result of the old and new products balancing each other out under unchanged total demand.

However, the awkwardness of Quest is not due to its own reasons; in the industry context, the Quest series is still the absolute leader, and with the pull of new products, its market share is still increasing, but the overall industry demand is too sluggish. And in the next quarter, without new products, even though the heat of 3S will continue, it will ultimately fall back to the performance of the off-season. (The following sales data for the Quest series are predicted values calculated by Dolphin, which are not accurate and are only used to observe trends.)

2. Can Profit Pressure Be Avoided?

In the fourth quarter, although the growth rate of operating expenses accelerated, it still did not drag down profits too much, meaning that Meta is still controlling costs. Compared to the previous quarter, if we exclude the impact of legal expense reversals, Q4 operating expenses increased by 10%, with management and sales expenses almost flat compared to the same period last year, aside from relatively high R&D expenses.

Ultimately, the operating profit margin increased by 6 percentage points quarter-on-quarter, of which 3 percentage points came from legal expense reversals.

In the fourth quarter, capital expenditures reached $14.8 billion, totaling $39.2 billion for the year, in line with the previously guided range of $38 billion to $40 billion. However, in 2025, Meta plans to significantly increase investments further, with capital expenditures expected to grow by 47% to 66% year-on-year Although it is within the market's expectations for funding, it will undoubtedly increase the pressure on cost control at the operational level.

Similar to the last quarter, in the short term, the operating profit margin in Q4 is expected to increase by 3 percentage points (excluding the recovery of legal expenses), and the contrasting changes in capital expenditure (up 88%) still stem from the delay in cost recognition windows and the traditional sectors' efforts to reduce costs and improve efficiency, such as the 5% layoffs announced at the beginning of the year and extending the depreciation period of servers.

The 5% employee optimization clearly targets the traditional advertising and operational management departments. For AI-related technical talents, Mark Zuckerberg is still eager to recruit. Therefore, in terms of overall employee costs, the impact of layoffs may not be fully reflected, and it may even lead to a significant increase in employee costs due to the high salaries of AI technical talents.

Extending the depreciation period was also an expectation mentioned by Dolphin in the last quarter's commentary. After all, compared to peers in the Mag 7 like Microsoft and Google, Meta has not extended the server depreciation period since 2022. This time, the company announced that starting this year, the average depreciation period for Meta's overall servers will be extended from 5 years to 5.5 years (the depreciation period is 6 years). The adjustment in the depreciation period has saved $2.9 billion in Opex this year.

However, despite the above internal optimization measures, the company expects Opex to still increase by 20%-25% in 2025, mainly due to the amortization and depreciation of the initial AI infrastructure investments and the salaries and benefits of newly introduced technical talents, including equity incentives.

Of course, the above incremental costs are mainly reflected in R&D expenditures, but to stabilize overall spending at around 20%, other expenses need to continue to be strictly controlled:

a. Excluding the recovery of legal expenses, management expenses remain flat

Management expenses in the fourth quarter decreased by 67% year-on-year, but this was mainly due to a prior overestimation of legal expenses amounting to $1.55 billion, which is now being refunded. After adding it back, management expenses remain flat with no growth.

b. Slight increase in sales expenses

Sales expenses in the fourth quarter slightly rebounded to a growth rate of 0.4%, which may be related to some marketing expenses for the launch of the Quest 3S new product. Overall, it remains very restrained.

c. Gross margin remains stable

The gross margin in the fourth quarter is now basically stable at 81.7%. Most of the AI costs are reflected in R&D expenses, so the gross margin is expected to remain stable within the range going forward

In the final quarter, Meta's operating profit margin was 48% (45% after excluding legal expenses), and when looking at the two major segments of advertising and VR, the increase in profit margin was mainly driven by advertising. As expected by the company's management, the losses in VR have continued to widen year-on-year, and significant reductions in losses will require more blockbuster products.

However, as anticipated by Dolphin since last year, the short-term lack of sufficient content ecosystem for VR means that hardware can only rely on cost-effectiveness. Perhaps a change in approach, such as AI glasses or new hardware categories combining XR and AI, may become new growth drivers.