Meta Earnings: Ad Sales Growth Continues to Accelerate Even as AI Costs Mount

Key Morningstar Metrics for Meta

• Fair Value Estimate
  : USD 850
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : High

What We Thought of Meta’s Earnings

Meta META kicked off fiscal 2026 with strong results, with the firm’s top line growing 33% to USD 56 billion. The firm’s operating margins contracted 90 basis points to 41% as AI-related costs rise. The firm also raised its capital expenditure guidance for 2026 to USD 135 billion from USD 125 billion.

Why it matters: Investors have been concerned about Meta’s ability to generate strong returns on its artificial intelligence investments. We see these quarterly results as further evidence that the firm is already generating billions of dollars from the large-scale AI investments in the form of ad dollars.

• AI-optimized ad and content recommendations are lifting time spent on Meta’s properties and conversion rates, boosting both the price (up 12%) and volume (up 19%) components of Meta’s ad sales growth algorithm.
• In particular, management called out AI-driven improvements that increased time spent across Instagram (10% lift on Reels) and Facebook (8% on video), and improved conversion rates (1.6% across Facebook and Instagram).

The bottom line: We reiterate our USD 850 fair value estimate for wide-moat Meta. With shares trading down after hours, likely spooked by the USD 10 billion increase in capital expenditure, we continue to view them as attractively priced.

• We think investors are underestimating Meta’s ability to leverage its AI investments to eke out further top-line gains by improving its ads business for advertisers while deepening its timeshare with users via more engaging content.

Big picture: We believe Meta has all the right ingredients to monetize AI at scale. The firm has low-cost infrastructure, via its own custom silicon, in-house models that are close to the frontier, and an engaged, growing distribution channel with more than 3.5 billion users.

• We believe that since the firm has all the right ingredients to make the AI return on investment work, investors should let Zuckerberg and his team cook.