Meta Platforms Inc - Class A

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 the rising expectations for capital expenditure among major cloud hyperscalers, including Meta, but does not provide a directional argument regarding Meta's future performance or investment potential.

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 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.

Meta has been a somewhat unique constituent of the Rozendal Global Fund. Our assessment in 2019 and early 2020 was that the market’s pessimism about Meta was overdone. The company’s ability to deliver value to advertisers remained unparalleled. The treasure trove of data that the company had of users enabled the delivery of advertisements with a degree of accuracy that could not be attained on any other media platform. At a price well below $200 per share, Meta offered compelling value to us. Two of the company’s key assets (Instagram and WhatsApp) were still vastly under-earning compared to their scale and user engagement.

Meta delivered another exceptional first half of 2026, with revenue growing 33% year over year to $56.3 billion in Q1 and 28% to $60.8 billion in Q2. The company's AI investments are yielding measurable results, with Instagram time spent growing at a double-digit rate and ad impressions increasing by 14%. Meta's AI-powered advertising products are scaling rapidly, with Advantage+ reaching a $75 billion annual revenue run rate. Despite market concerns over capital expenditures, the evidence of improved engagement and advertising performance gives us confidence in Meta's long-term growth potential.

Meta is positioned strongly within the ongoing AI infrastructure build-out, as evidenced by its significant capital expenditures. The company has committed to enhancing its AI compute capacity, which is crucial for its future growth. The hyperscaler capex, including Meta's, has risen dramatically, indicating a robust demand for AI-related services. This trend suggests that Meta's investments will yield substantial returns, reinforcing its competitive moat in the technology sector. The manager believes that Meta's strategic focus on AI will improve its legacy business and drive long-term value.