Meta released its Q2 earnings on 29 July and investors zoomed into its 16% EPS miss and the lifting of its target capex floor from $125 billion to $130 billion. Investors expressed concern over Meta’s AI strategy as it continues to burn cash which resulted in FCF for the quarter to fall under $1 billion. Total debt has increased (now above $100 billion), making investors sceptical over the return on investment on this massive capex cycle.

The market sell-off resulted in Meta dropping into deep value territory with a valuation showing a forward PE of 18.3x. Other big tech firms have much higher forward PEs - Alphabet (25.9x), Apple(33.2x), Microsoft (25.2x) and Amazon (28.7x). Also debt concerns are being overblown. Current Net Debt is ~$22 billion and Net Debt to EBITDA is 0.2.

Investors have valid concerns as Meta does not have a history of organic innovation that creates new growth verticals. Mark Zuckerberg’s foray into the metaverse and the resulting cash incineration left a scar on investors which has diminished trust in the company. Investors fear repeating metaverse 2.0 with Meta’s current AI spending

However, I believe Meta is at the forefront of the AI tide that is currently reinventing the platform business model. Their latest results show the early stages of this cycle with advertising revenue increasing by 27% y/y due to a 14% increase in impressions and 12% price increase. Mark Zuckerberg explained this during the earnings call when he stated that Meta was probably the best company in the world at scaling products and formats that work to its ecosystem. As Meta continues to scale new AI products and formats to its ecosystem of 3.6 billion daily active users (DAU), I anticipate more value to be created and a new growth cycle to be unlocked. This is why I am bullish Meta.