Meta's AI Ad Surge Highlights Growth Amid Mounting Investment and Valuation Risks

What happened

A recent article touts Meta's AI-driven advertising innovations, such as the Advantage+ system achieving a $60 billion annual revenue run rate, showcasing the continued strength of its core ad business. However, the DeepValue report reveals that Reality Labs lost $17.73 billion in 2024 with losses expected to increase, while capex is surging to $70-72 billion in 2025 for AI infrastructure. Despite ad revenue growth of mid-20s% and robust free cash flow, the stock trades at around 28x earnings, approximately 128% above a conservative DCF estimate, embedding optimistic assumptions about future returns. Regulatory overhangs, including antitrust cases and tax disputes, alongside competition from TikTok, threaten to erode Meta's advertising moat and margin of safety. The juxtaposition of AI monetization progress with heavy, loss-making investments underscores the critical balance between growth potential and financial risk.

Implication

Near-term, AI advancements like Advantage+ could drive ad revenue and support earnings, but Reality Labs' $18 billion annual losses and a $70-72 billion capex surge risk diluting shareholder value. High multiples at 28x P/E leave little margin for error, requiring flawless execution on AI monetization to justify current prices. Regulatory and competitive pressures, such as FTC actions and TikTok rivalry, could constrain growth and increase costs, impacting Meta's durable cash flows. Therefore, a prudent approach involves monitoring capex efficiency and RL loss trends before considering investment, as the risk/reward skews negative at current levels despite ad strength.

Thesis delta

The new article confirms accelerated AI ad monetization with Advantage+'s $60 billion run rate, slightly bolstering the case for Meta's core business resilience. However, this does not materially alter the deep-seated risks from Reality Labs losses, surging capex, and regulatory threats highlighted in the DeepValue report. Thus, the overall thesis of a potential sell remains intact, with updated evidence of ad growth but unchanged concerns over investment discipline and valuation.