Meta (META.US) ahead of Deutsche Banks expectation! Strong momentum in advertising business growth, but massive spending outlook could raise concerns.

MetaPlatform (META.US) will announce its fourth quarter performance for the year 2025 after the US stock market on January 28th (Wednesday). Deutsche Bank Aktiengesellschaft released a report stating that they expect Meta's Q4 revenue to reach $59 billion (a 22% increase year over year), higher than the previously estimated $58.5 billion. They also anticipate total expenditures for Q4 to be $34.4 billion, which would put the total annual expenditures at the midpoint of the company's forecast range of $116-$118 billion. For the first quarter of 2026, Deutsche Bank predicts revenue will increase by 23% to $51.9 billion, with market consensus expectations at $51.2 billion. They also forecast total expenditures to rise by 32% to $32.6 billion, with market consensus expectations at $33.1 billion. Deutsche Bank has given Meta a "buy" rating with a target price of $880 which represents a potential 34% increase from the stock's closing price last Friday. Deutsche Bank stated that Meta's guidance on total expenditures and capital expenditures for 2026 will be a key focus. Their communication with buy-side institutions indicates that they expect Meta's 2026 total expenditures to range between $150-$160 billion, with capital expenditures between $120-$130 billion. Deutsche Bank believes that Meta is in a favorable position due to its increased investments in the field of Artificial Intelligence (AI), especially in the long term. However, concerns about Meta's significant expenditure for 2026 impacting profitability and reduced financial flexibility due to substantial short-term investments may partially offset optimistic growth expectations. Nonetheless, excluding expenditure guidance, Deutsche Bank expects investor expectations to increase as Meta prepares to launch a series of models, particularly after Chief Technology Officer Andrew Bosworth emphasized the potential of the models developed by the Meta Superintelligence Laboratory (MSL) team. Channel checks indicate that revenue growth is likely to remain strong. Deutsche Bank noted that during a call with Andrew McClay, Managing Director of Inventus Media, focusing on the media/entertainment industry, he observed a significant increase in digital advertising spending in the fourth quarter of 2025 driven by improvements in return on investment in AI-based investments from Meta and Alphabet Inc. Class C. McClay mentioned that since early 2025, overall advertising spending, including traditional media, has been twice the GDP growth rate, mainly due to the real and tangible benefits brought by AI in improving data analysis, resulting in better targeted advertising and automated creative generation. Therefore, platforms like Alphabet Inc. Class C and Meta saw an increase in return on investment in the fourth quarter of 2025, compared to the historical average of a 2% increase year over year. McClay also highlighted Meta as one of the few platforms fully utilizing its AI capabilities across its entire infrastructure. Engagement remains a key performance metric showing continuous improvement. According to Sensor Tower data, total usage time for Meta's Facebook and Instagram applications continues to accelerate. This growth is driven by the increasing user base of Instagram, improving trends on Facebook, and increasing daily engagement. Since the fourth quarter of 2024, there has been a noticeable increase in engagement, reflecting ongoing improvements in Meta's recommendation system to provide personalized services to users. Both ad impressions and eCPM (revenue earned per one thousand ad impressions) are growing at healthy double-digit rates. Advantage+ is Meta's AI-powered end-to-end marketing solution designed to help businesses streamline ad placement processes and enhance effectiveness. Deutsche Bank highlights that as Advantage+ becomes the default ad series setting for more advertisers, and with ongoing improvements in ad technology stacks, they see AI-enhanced features increasingly improving ad return on investment. Deutsche Bank expects this to be a sustained source of growth for Meta in the future, especially given the upcoming launches of 1) Andromeda - Meta's AI-driven ad search engine - which has not been fully rolled out on Instagram feeds and Reels yet, 2) GEM - Meta's generative ad model - enhancing other ad recommendation models to provide relevant ads and improve ad effectiveness and advertiser return on investment, and is expected to expand in 2026 with larger GPU clusters for training and extension to Facebook Reels, offering continued improvement opportunities, and 3) Lattice - an ad ranking architecture - where model simplification will enhance ad return on investment. As a result, Northbeam data shows strong market share retention for Meta is not surprising. With conversion speeds exceeding impressions growth rates, Deutsche Bank optimistically believes that better ad return on investment and very healthy single-operation cost trends will lead to larger ad budget allocations in the near to medium term. Deutsche Bank raises revenue growth and operating expenditure forecasts. Based on the stronger-than-expected growth momentum in the fourth quarter of 2025 and the weakening US dollar, Deutsche Bank has raised its fourth-quarter revenue forecast for Meta by approximately 1% to $59 billion. The bank still anticipates that Reality Labs division revenue may decline by a double-digit percentage year over year in the fourth quarter, likely due to a lack of new headset releases and retailers accelerating revenue into the third quarter of 2025 Deutsche Bank has also raised the year-over-year growth rate forecast for Meta's fourth-quarter advertising revenue from 22% to 23%. Based on this, the bank believes that the market could revise upward the estimate for Meta's 2026 advertising revenue growth rate from the current 18%. In the short to medium term, Meta will benefit from improvements in its advertising and recommendation infrastructure. However, concerns remain about the potential impact on Meta's applications in the EU region where non-personalized advertising versions may be required (according to the Digital Markets Act). While Meta may seek modifications, the outcome is unclear due to ongoing political issues with GEO Group Inc. Therefore, for 2026 and 2027, Deutsche Bank has slightly raised expectations to reflect continued strength in the core advertising business. Additionally, despite Meta recently disclosing a 10% reduction in the Reality Labs division, Deutsche Bank believes expenditure growth in 2026 may be slightly faster than previously forecasted, primarily driven by 1) higher infrastructure expenditures, including increased public cloud expenditures, higher energy costs, and increased depreciation and amortization; 2) personnel-related costs from investments in generative AI and the Superintelligence lab. Meta's off-balance sheet commitments increased to approximately $140 billion in the third quarter of 2025, reflecting their focus on investing in AI. As Meta begins executing current leases included in the commitments, Deutsche Bank expects significant increases in leasing costs and liabilities reported for 2026. In the long term, as more self-built data centers come online, the depreciation and amortization growth rate may accelerate.