Revenue in June was up 22% y/y, beating the Street’s revenue expectations by 2% and EPS by 9%. September quarter guidance was also raised at the midpoint by 1.7%. The company will likely come in at the high end of guidance which means growth in the September quarter will likely be 20% y/y compared to previous analyst expectations of 15% growth.

Family Daily Active People (DAP) was a showstopper, reaching 3.27B up 7% y/y, which was essentially the same growth as reported in the Mar-24 quarter. That means that 41% of the world’s population uses a Meta product daily and it’s growing at 7%, which is hard to believe. As a point of reference, this is the second highest daily reach of any company behind Google, which I estimate is around 3.5B daily users (across its 6 core products). In other words, to reach distribution at that scale is next to impossible, and to continue to grow it at 7% defines world-class addictive products.

Despite CapEx coming in 14% lower than expected, the company raised the full year target to $37B- $40B vs. previous $35B-$40B. This is important because it’s a read on their conviction in AI. The greater the infrastructure spend the higher the AI conviction. Zuckerberg made clear the spending was not going stop.

As he said in a Bloomberg interview in late July:

“I think Al is gonna be very fundamental. I think that there’s a meaningful chance that a lot of the companies are overbuilding now and that you look back and you’re like, oh, we maybe all spent some number of billions of dollars more than we had to. But on the flip side, I actually think all the companies that are investing are making a rational decision because the downside of being behind is that you’re out of position for, like, the most important technology for the next 10 to 15 years.”

Reading between the lines of the above comment, I expect CapEx will end the year higher than $40B, which would be up almost 50% y/y, in line with the other mega cap spend.

Meta outlined its most compelling case for its AI monetization strategy by segmenting the roadmap into two segments. Core AI and Generative AI.

Core AI: the smaller of the opportunities. Core AI is shaping existing Meta products via recommendations, helping users find better content, and making the advertising experiences more effective. These AI use cases are already contributing to revenue, and I believe these initiatives will result in advertising growth remaining higher than many investors expect with mid-teens growth for the next couple of years. Most investors believe ad growth will slow to closer to 10% in CY26.

Generative AI: the larger of the opportunities. Meta’s Generative AI initiatives involve creating new experiences and business lines, such as the Llama, Meta AI assistant, AI Studio, business AI agents. While generative AI is not expected to be a significant driver of revenue in the near-term, Zuckerberg made the case that this will be a much bigger opportunity compared to Core AI, unlocking new revenue opportunities over time over the next 3-5 years. The goal is to get these business (Llama, Meta AI assistant, AI Studio) to reach 1B users before focusing on monetization. This was a similar roadmap the company took with Facebook, Instagram, and Messages. I believe the company can add 2 new businesses that could be worth hundreds of billions of dollars, each based on the combination of past successes, along with the potential in AI.

Reality Labs is typically a concern for investors. This quarter we saw a glimmer of hope.

First, the bad news: Reality Labs had an operating loss of $4.5B in the June quarter, compared to Mar-24 at $3.9B, and contributing to the nearly $50B in losses since 2020. This year, I estimate the business will lose close to $20B based on the same language the company provided last quarter to “continue to expect 2024 operating losses to increase meaningfully year-over-year”. Last year, Reality Labs lost $16B.

Good news: Reality Labs revenue grew for the 3rd straight quarter, up 28% y/y, compared to 30% in Mar-24 and being down 39% in Jun-23. Despite tougher comps beginning in Dec-24, I expect Reality Labs to continue to expand the segment as they move away from the Metaverse.

Great news: I believe over the next year they’ll shift the segment’s strategy away from the closed-off Metaverse to more of ambient computing. This would create a mass market product that sells 50m plus devices a year. This means the product focus shifts away from Quest to the Meta Ray-Bans wearable glasses approach. As a point of reference, check out Google’s Project Astra approach, which I believe is similar to what Meta wants to accomplish long-term in wearables. That’s bringing together lightweight glasses that look “normal”, adding computer vision and generative AI. I believe these wearables will become a must have consumer device, and I expect over the next five years the competition will increase with the likes of Apple entering the picture.

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