META Q1 Earnings Call: AI Investment Drives Growth but Guidance Misses Expectations

Social network operator Meta Platforms (NASDAQ: META) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 16.1% year on year to $42.31 billion. On the other hand, next quarter’s revenue guidance of $44 billion was less impressive, coming in 0.9% below analysts’ estimates. Its non-GAAP profit of $7.69 per share was 47.7% above analysts’ consensus estimates.

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StockStory’s Take

Meta’s first quarter results reflected ongoing momentum in its advertising business and the growing impact of artificial intelligence across its platforms. Management attributed the quarter’s outperformance to improvements in ad targeting and creative tools powered by AI, as well as user growth on both established and emerging platforms like Threads and Ray-Ban Meta AI glasses. CEO Mark Zuckerberg pointed to AI-driven enhancements in ad performance and user engagement, saying, “Our community keeps growing with more than 3.4 billion people now using at least one of our apps each day.”

Looking ahead, management set a cautious tone regarding its revenue outlook, citing macroeconomic uncertainty and new regulatory headwinds—especially in Europe. CFO Susan Li noted that the company’s second quarter guidance factored in “reduced spend in the US from Asia-based e-commerce exporters” and potential impacts from the European Commission’s Digital Markets Act. She added, “We continue to feel good about the fundamental drivers of revenue growth,” but acknowledged that a dynamic operating environment could lead to a wider range of outcomes.

Key Insights from Management’s Remarks

Meta’s management focused on how AI advancements are shaping both the user experience and the core advertising business. The leadership team also discussed progress in newer business areas and the challenges posed by regulatory changes.

• AI-Powered Advertising: Meta’s ongoing upgrades to ad recommendation systems, such as the Generative Ads Recommendation Model (GEM), have improved ad conversion rates and enabled more advertisers to utilize AI-driven creative tools. Management highlighted that 30% more advertisers used AI creative tools in the last quarter, with a new model increasing Reels ad conversion rates by 5%.

• User Engagement Gains: Improvements in AI-driven recommendation systems drove higher user engagement across platforms. Time spent on Facebook increased 7%, Instagram 6%, and Threads 35% over the past six months. Threads now has over 350 million monthly active users, signaling traction as a new social platform.

• Business Messaging Growth: Meta continued to expand business messaging capabilities, especially on WhatsApp. While business messaging already drives revenue in certain markets, management believes AI will play a key role in making these tools viable in higher-cost markets over time.

• AI Glasses and Reality Labs: Sales of Ray-Ban Meta AI glasses tripled year-on-year, and new features like live translation were rolled out. However, Reality Labs remains a source of significant investment and operating losses, as Meta continues to prioritize scale and product development over near-term profitability.

• Regulatory and Market Dynamics: Management acknowledged regulatory risks in the European Union, where new requirements under the Digital Markets Act could negatively impact user experience and revenue beginning as early as the third quarter. They are appealing the decision but preparing for potential changes to their subscription model.

Drivers of Future Performance

Meta’s management expects future performance to be shaped by continued investment in AI, evolving regulatory requirements, and the company’s ability to deepen monetization across its platforms.

• AI Infrastructure and Product Rollout: Meta is increasing capital expenditures to accelerate data center and compute capacity, aiming to support both core ad products and new AI-driven experiences. Management believes additional investment will be necessary to meet rising internal demand for AI resources.

• Regulatory Uncertainty: The company faces potential revenue headwinds from regulatory changes, particularly in Europe. Management warned that modifications to comply with the Digital Markets Act could reduce engagement and monetization in affected regions.

• Business Messaging and New Monetization Streams: Meta is working to scale business messaging tools and AI agents for small businesses. Management views these products as incremental to current advertising revenue and critical for long-term growth, especially as messaging becomes more deeply integrated into commerce.

Top Analyst Questions

• Brian Nowak (Morgan Stanley): Asked about Meta’s advancements in large language models (LLMs) and Meta AI user traction. CEO Mark Zuckerberg emphasized the focus on low-latency, personalized AI and context window length, noting, "We are building out the leading infrastructure and teams that we need."

• Eric Sheridan (Goldman Sachs): Inquired about the rationale for a standalone Meta AI app versus integration within existing apps. Zuckerberg said the standalone app is aimed at providing more immediate access, especially in the U.S. where WhatsApp is less dominant.

• Justin Post (Bank of America): Questioned the impact of e-commerce supply issues on guidance and the return on large capital expenditures. CFO Susan Li cited uncertainty in Asia-based e-commerce spend and stressed that CapEx is directed at maintaining leadership in AI infrastructure.

• Doug Anmuth (JPMorgan): Sought clarification on the breakdown of CapEx increases and the potential for partnership in funding AI infrastructure. Li explained that higher hardware costs and accelerated data center builds are main drivers, but Meta remains the primary funder of its AI training infrastructure.

• Youssef Squali (Truist Securities): Asked about the competitive landscape for AI chatbots and the financial impact of European regulatory actions. Zuckerberg discussed personalization and multimodal capabilities as Meta AI’s differentiators, while Li acknowledged it is too early to quantify the regulatory impact but noted European ad revenue represents 16% of 2024 totals.

Catalysts in Upcoming Quarters

In the coming quarters, our team will be watching (1) how Meta executes on scaling its AI infrastructure and rolls out new AI-driven ad and messaging features, (2) the evolution of regulatory developments in Europe and their effect on user engagement and revenue, and (3) whether new monetization efforts in business messaging and AI-powered products gain meaningful traction. Progress in Reality Labs and uptake of Meta AI’s standalone app will also be closely monitored as indicators of longer-term strategic success.

Meta currently trades at a forward EV/EBITDA ratio of 13×. At this valuation, is it a buy or sell post earnings? Find out in our free research report.

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