The Big Four's performance diverges after results! Who is the real winner in AI?

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Meta: Spending money doesn't build a top model, and Zuck is getting anxious again

(This article was authored by Dolphin Research, and published by Titanium Media with authorization)

By Dolphin Research

Hello everyone, I’m Dolphin Jun!

The issue with Meta's Q1 earnings report isn’t about the current quarter but rather that the new guidance did not alleviate expectations of a continued margin decline. This contrasts with investor expectations for reduced spending driven by rumors of tightened expenditures prior to the earnings release. Fundamentally, however, it’s because Meta lacks a second growth curve to fulfill its AI narrative, causing investors to lose patience once again.

Specifically:

1. Spending wasn’t tightened; further investment is needed:Meta raised its full-year Capex guidance by $10 billion, bringing it to a range of $125-$145 billion (due to rising prices of components like memory). At the same time, there was no downward adjustment to Opex guidance as hoped by the market.

Over the past two months, rumors circulated about Meta tightening VR investments and conducting rounds of layoffs, leading to some market expectations of spending cuts. However, actual spending increased instead of decreasing, which clearly did not meet expectations.

2. Revenue growth did not accelerate in tandem:Whether the market accepts the move to 'increase investment' depends on whether sufficient growth can be achieved under high spending. For instance, last quarter’s Capex guidance was also raised, but it came with significant acceleration in Q1 revenue growth expectations. Therefore, despite funds being overly conservative on Meta ahead of the earnings report, there was still a wave of 'expectation revision.'

However, this time, the increase in Capex guidance corresponds with a Q2 revenue forecast showing slowing growth (a median growth rate of 25% vs. Q1’s 33%).Although the growth itself isn’t bad, it might also consider macro impacts from Middle Eastern turmoil.Meanwhile, forward-looking indicators such as user activity saw their first seasonal decline in Q1, implying more margin pressure for the year. This marginal change clearly deviates from buyer fund expectations.

3. Relying solely on the core advertising business, the true potential of AI cannot be fully realized:It is undeniable that the advertising business itself remains very strong，The company is currently in a favorable period. Revenue grew by 33% in the first quarter, surpassing guidance and meeting buyer expectations.

However, this growth is not entirely attributable to AI. First, the macroeconomic environment in North America was solid in the first quarter, coupled with the Winter Olympics' popularity and the ongoing trend of consumer goods marketing shifting online. Moreover, the short-video trend has allowed Reels to enjoy increased benefits, with CPM rates continuously rising. In addition, the direct incremental revenue from the commercialization of Threads can also be considered part of the inherent growth momentum of the advertising industry, which would benefit the company even without AI.

However, the company lacks a new growth curve like Google Cloud, which is almost purely AI-driven and has entered a phase of realization outside its core advertising business. This clarity allows investors to calculate the ROI of AI investments more precisely. But for the company, despite increasing investments, the 'pure AI return rate' remains unclear and seemingly not as high as expected.

As the implied growth trajectory in Q2 guidance gradually slows down, investor confidence in continued high investment could be questioned. Even if not outright opposition, the reduced clarity in growth alone could impact the stock's short-term valuation anchor.

4. Maintaining positive profit growth as the bottom line:Profit performance in the first quarter was acceptable, achieving an operating profit of $22.9 billion, with a stable operating margin of 41% (net profit growth was mainly due to changes in tax policy in February, resulting in an $8 billion reversal of a tax provision, excluding which net profit was $18.8 billion, up 13% year-over-year). Apart from reduced losses in the RL segment, there are reasons related to depreciation and amortization not keeping pace with high Capex investments; depreciation costs only rose 10% quarter-over-quarter, and Capex in Q1 was less than $20 billion, accounting for 14%-16% of the latest annual Capex guidance.

Before the earnings report, the market expected operating profit growth for 2026 to be 4-5%. Although no upward revision to Opex guidance was made this time, the lack of contraction in spending might still raise concerns among investors about downward adjustments to full-year profits. Management provided assurance of positive operating profit growth for the full year, which helped set a floor for results, otherwise, the market reaction to the earnings report could have been even more negative.

5. Stock price under pressure, share repurchases remain suspended:Share repurchases halted last quarter, but this quarter the company is determined to continue aggressive investments even if it means borrowing funds, despite significant downward pressure from a sharp correction in stock prices. Similar to Google, Meta's shareholder returns are limited to a stable dividend payout of $1.35 billion, which offers a rather low return rate.

At the end of Q1, Meta had $81.2 billion in cash and short-term investments on its balance sheet, flat quarter-over-quarter, with free cash flow of $12.4 billion for the quarter.

6. Summary of key performance indicators

Dolphin's Perspective

Compared to Google’s performance, despite both companies increasing capital expenditures under strong revenue growth, investor sentiment and market reactions have been markedly different. The key reason lies in Meta's inability to fully demonstrate that its investments are yielding corresponding returns.

Although part of the rapid growth in advertising can be attributed to AI (such as improved algorithmic recommendations or AI-powered features boosting user engagement), the inherent strength of advertising itself also played a significant role. Moreover, advertising remains Meta's core business, and given its already high market share, room for further growth is limited. On the other hand, Google's cloud business benefits from dual drivers: substantial room for market share expansion and renewed high industry prosperity, creating enormous growth potential.

In short, AI currently represents more of a defensive cost for Meta. Accelerating pure AI monetization is one way Meta could gain investor approval for its high spending, but the most effective AI business models right now still lean toward B2B productivity scenarios. Purely B2C monetization methods, whether subscription-based or ad-supported, remain immature in terms of user penetration and are still loss-making ventures.

Thus, in the short term, given the challenges in developing a second growth curve, investors may prefer to see better control and reduction in spending.(However, considering the unavoidable costs of technological advancement, spending cannot be cut excessively.)At least compared to continued heavy investment without clear direction. After all, an annual capex of $140 billion is a significant burden for Meta, even with its highly profitable business model, accounting for more than half of its annual revenue.

The current dilemma places Meta's valuation at around 20x PE, likely remaining below its historical average of 25x PE throughout the year. This aligns with our earlier assessment at the beginning of the year that opportunities for Meta lie in bottom recovery rather than expecting a breakthrough during periods of peak market sentiment.

Based on a 25% annual revenue growth rate, operating expenses guidance of 165 billion, and an effective tax rate of 15%, the projected operating profit for 2026 is 85 billion, up 3% year-over-year, with post-tax operating profit at 72.3 billion. After an 8% drop in pre-market trading, the market capitalization stands at 1.55 trillion, corresponding to a PE ratio of 21x based on this year's earnings, which aligns with the valuation center under short-term pressure but still falls short of our ideal 'bottom recovery opportunity' safety level.

Meta's vision for AI has always been long-term, aiming not just to be a productivity tool service but a super-intelligent assistant for ordinary people. Therefore, the current focus remains on Meta AI's daily active users (DAU) rather than monetization.

However, if one’s risk preference is higher, it is also possible to trade time for space by extending the cycle and calculating based on slightly optimistic expectations.：Currently, bullish investors often overlook this year's earnings pressure and anticipate that next year's profit growth will recover, directly using the 2027 performance as a benchmark for target value.

If calculated this way, it corresponds to an operating profit of 105 billion, representing a 24% year-over-year increase, indicating that the current market cap still has some room for recovery. Of course, such recovery would require event-driven catalysts, such as new developments in the Muse large model or renewed expectations of interest rate cuts.

Below is the detailed interpretation.

1. A slowdown in guided growth, and the pain of lacking a second growth curve.

In Q1, Meta reported revenue of 56.3 billion, accelerating year-over-year growth to 33%, with a favorable currency impact contributing four percentage points, in line with more optimistic buy-side expectations.

Q2 revenue guidance:Meta management expects total revenue for Q2 2026 to range between 58 billion and 61 billion, corresponding to year-over-year growth of 22% to 28%, including a two-percentage-point tailwind from currency effects. Although the guidance meets sell-side expectations, it does not exceed them as per usual practice, and the growth rate itself shows a sequential slowdown, making the outlook appear less positive.

Looking at the specific business segments:

1. Advertising Business: Driven by Reels and AI

For the advertising business, Dolphin Intelligence tends to break down the current volume and price growth trends to better understand the current macro environment, competition, and other issues.

1) Ad impressions

In the first quarter, ad impressions continued to accelerate, growing by 19%.

This growth is partly due to the expanding user base. DAP (the DAU of Meta Group's suite of apps) increased by 4% year-on-year, but its growth rate slowed and showed a seasonal decline for the first time, indicating subsequent growth pressures. On the other hand, it is also driven by the increase in the proportion of time spent on Reels (daily Reels content posting accounts for more than 30%, doubling year-on-year), which naturally boosts ad impressions, with per capita impressions continuing to grow at an accelerated pace.

2) Ad price

In the first quarter, the ad price increased by 12%, showing a rebound.

The rise in short-video ad penetration typically lowers the overall ad price. After nearly three years of evolution, from a marginal change perspective, Reels' eCPM has been continuously rising. Internally, Instagram’s CPM is currently at 7 USD, reaching 80% of Feed and Story. However, the pricing for Feed and Story is trending downward, reflecting users’ preference for short-video content and advertisers' recognition of the traffic and conversion effectiveness of short videos.

In addition, regarding new product monetization: The commercialization of Threads has been expanded to more regions, and WhatsApp status ads are now viewed by hundreds of millions daily.

2. VR: Continued Contraction Phase

In the first quarter, Reality Labs' total revenue was 400 million, a year-over-year decline of 2.4%, mainly due to the drop in Quest sales. The daily active users of AI glasses have grown threefold year-over-year, and in Q1, Ray-Ban Meta optical glasses (designed for all-day wear) were launched. The focus will further shift towards AI glasses, with overall investment contracting to control losses (last quarter's guidance indicated a reduction of 3 billion in expenditures by 2026) and making way for the development of AI models and applications.

Second, layoff rumors are swirling, but AI investment is increasing instead of decreasing

Total operating expenses in Q1 increased by 35%, though growth slowed sequentially, which allowed for decent operating profits during the period, with profit margins declining slightly by 0.7 percentage points from the previous quarter. However, management’s guidance on full-year Opex and Capex suggests that the Q1 situation was an exception. Nevertheless, the company has expressed a commitment to positive growth in operating profits for the full year, implying a baseline revenue growth of 25%.

The number of employees decreased by 879 sequentially in Q1, marking the beginning of a layoff cycle. According to rumors, layoffs this year could reach 20%, or around 15,000 people. Despite the large-scale layoffs, the company did not lower its full-year Opex guidance but instead increased Capex, which disappointed investors.

Specifically, R&D expenses grew by 46%, administrative expenses increased by 15%, and sales expenses rose slightly by 5%. Ultimately, strong revenue growth of 33% largely offset the 35% expansion in overall operating expenses.

In terms of operating profits by business segment, RL’s loss rate declined with fluctuations, while the advertising core business margin weakened by nearly 4 percentage points year-over-year.

Capital expenditure in the first quarter reached 19.8 billion, down over 2 billion sequentially. However, the full-year 2026 capital expenditure guidance was raised by 10 billion to a range of 125-145 billion from 115-135 billion, indicating that the Q1 situation was temporary and future investments will remain substantial.

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