Meta is facing significant challenges as it has reportedly squandered approximately -$80B on the metaverse and is now misallocating funds towards AI without yielding results. The expected capital expenditures for AI in 2026 are projected to be around $125–145 billion, yet evidence suggests that Meta's AI models, such as Llama, are not competitive, and even its employees do not utilize them. This lack of internal adoption and the company's pivot to a cloud business indicate a failure in execution and strategy, leading to a bleak outlook for cash flow and shareholder tolerance for further losses.

Meta is mentioned in the context of rising capital expenditure expectations among major cloud hyperscalers. The expected FY26 capex by Meta has increased to the upper end of its $130–$145bn range. However, there are concerns regarding the overall economics of rising investments in AI and data centers, as well as the potential impact on free cash flow. The letter discusses the broader implications of these trends but does not provide a specific bullish or bearish stance on Meta itself.

The letter discusses Meta Platforms in the context of sector performance, noting that it was part of the Communication Services sector, which lagged due to profit-taking. However, there is no explicit bullish or bearish argument made regarding Meta Platforms' future performance or valuation.

The letter discusses Meta Platforms in the context of sector performance, noting that it was part of the Communication Services sector, which lagged due to profit-taking. However, there is no explicit bullish or bearish argument made regarding Meta Platforms' future performance or valuation.

We view Meta as one of the clearest beneficiaries of AI, which is driving higher engagement through better content recommendation, greater ad monetization through improved targeting, and meaningful product innovation in consumer and business agents. Though still in the early days, these benefits are already visible in greater revenue acceleration in Meta's core advertising business, which is growing at its fastest quarterly pace since 2021. Following this year's elevated investment, we expect Meta to grow earnings at a 20%-plus rate over the next few years. Against this growth backdrop, we view Meta's 18 times forward earnings multiple as a highly discounted valuation for a dominant consumer internet franchise with a stable user base of 3.6 billion daily active users.

Founded in 2004 as Facebook, Meta Platforms has grown into one of the most widely used communication and media networks in history. Its Family of Apps – Facebook, Instagram, WhatsApp and Threads – now reaches more than 3.5 billion people every day. Meta sits at the center of the global digital advertising market, where a meaningful share of the world's attention and advertising budgets is spent. We believe Meta's economic moats are unusually deep, supported by powerful network effects, an enormous base of first-party engagement data, and significant scale in its infrastructure and ad system. Importantly, Meta reinvests heavily to defend and extend these advantages, adapting its products to shifts in consumer behavior, such as the pivot to short-form video.

Meta Platforms declined slightly during the quarter, as investor skepticism around the company's escalating AI capital expenditure commitments continued to overshadow strong results. The source of investor concern was the company's decision to raise its 2026 full-year capital expenditure guidance from $125 billion to $145 billion, nearly double 2025 levels, to fund an accelerating AI data center and compute infrastructure buildout. With second-quarter 2026 AI-driven ad automation expected to boost advertiser return on investment by an estimated 20% to 22%, the next earnings report represents a critical checkpoint for demonstrating that the capital deployment is generating the returns the investment thesis requires.

Meta's recent performance has raised concerns about its ability to generate returns on its significant capital expenditures. While the company grew its revenue by 28%, it simultaneously faced a staggering 91% drop in free cash flow, indicating that its heavy spending is not translating into immediate financial benefits. The market is rationally demanding to see a return on this investment, and without a visible AI revenue stream to justify the expenditure, Meta's position appears increasingly precarious. This situation is compounded by the broader trend of major AI spenders, including Meta, facing a squeeze on free cash flow as they ramp up capital expenditures.

We view big tech, following the June sell-off, as attractively priced with reinforced moats and multiple revenue streams — offering good upside potential and relatively small downside risk when measured against the market's overall downside risk. The underlying issue for the hyperscalers today is similar: they built their reputations as asset-light businesses, and the AI buildout is forcing them to become considerably less asset-light. Somewhere between the initial buildout and the return on that investment finding equilibrium, these companies will regain clarity on future cash flows and earnings projections, and the market will reprice them accordingly.

Meta Platforms has uniquely powerful data and distribution advantages and the company is investing aggressively in its own artificial intelligence models and compute to make its advertising platform more effective. Meta’s core business has among the most straightforward and compelling commercial use cases for AI that we are aware of. The company’s ability to leverage and improve its own models within this robust and proprietary feedback loop should draw additional advertising dollars and further the company’s lead in time. We initiated a position in Meta in our Concentrated strategy and added to our existing position in Core during the second quarter.